The Investment column: Shell set to explore brave new world

Shell tracked the market faithfully during the recession but it shrugged off the wider gloom in 1994 and has been widening the gap ever since. Better-than-expected full-year figures yesterday lifted the shares another 27.5p to 1,089p, fully justifying outgoing chairman John Jennings's decision to give shareholders a two-for-one scrip to lower the price.

Often criticised in the past for being slow to react to a fast-changing world, Shell has actually rewarded patient shareholders well over the years. Investors who bought 10 years ago, just before the crash, and held on, have seen their capital grow three-fold. Reinvesting the steadily growing dividends over that period would have led to a six-fold appreciation.

Yesterday's 30 per cent rise in net income to pounds 5.7bn, a record, underlined the benefits of diversified groups such as BP and Shell. In a year when the oil price rose steadily to well above its average trading range over the past 15 years, buoyant returns from exploration and production (up 74 per cent to pounds 3.2bn) were more than enough to offset a slump in chemicals profits (down 30 per cent to pounds 762m) and an indifferent refining and marketing performance (2 per cent better at pounds 1.75bn before exceptionals).

The upstream arm benefited from the price of Brent crude rising to its highest levels since the Gulf war spike in 1990/91. Shell has an unmatched spread of exploration prospects world-wide and is cutting the cost of extracting oil along with the best in the industry.

It is elsewhere in the business, however, that Shell's future performance will be decided. Refining margins have been under pressure around the world for so long that inadequate returns are becoming the norm. In chemicals, that is the case in spades, and the challenge is relentlessly to cut costs and to churn the portfolio away from the basket case products where oversupply and weak demand mean there is no hope of ever getting a sensible margin.

Marketing, the lion's share of the downstream operation, is the real problem area, with deregulation in previously protected markets such as Japan causing havoc as old retail boundaries break down. In the brave new world of supermarkets selling petrol and oil companies peddling forecourt groceries, it will require nimbler feet than Shell has shown in the past to come out on top.

Shell's $12.3bn cash pile puts the company in an enviable position ahead of what the company forecasts to be a sustained rise in oil and gas production of perhaps 7 per cent a year for the next five years. To benefit fully from that it must beef up its spending on exploration and production capex, continue to explore partnerships such as the Texaco and Amoco alliances in North America and reduce the company's exposure to the other damaging downstream cycles.

Shell will never set the investment pulse racing, but as a steady, core holding in an extremely well-run, reliable company, it is unbeatable.