Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.forbes From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: ''The opportunities are enormous'' Date: Fri, 6 Nov 92 11:08:08 EST Message-ID: "Copyright 1992 Forbes, Inc. Any further reproduction or redistribution without the express written permission of Forbes and ACC is prohibited." ''The opportunities are enormous'' While much of the oil industry has turned cautious, Royal Dutch/Shell is moving ahead at full speed. By James R. Norman THESE ARE TOUGH TIMES in the oil business. Development costs for new fields, many offshore, keep growing, and worthwhile new reserves are in- creasingly hard to find. Refinery costs are rising, too, especially as a result of added environmental protection, now required in most parts of the world. But with prices soft, the industry can't easily pass these higher costs to consumers. These are good times for Royal Dutch/Shell Group, which alone among the major oil companies is going for growth. Not for Shell the troubles facing British Petroleum. Former chief executive Robert Horton bet that ris- ing energy prices would justify sharply increased investment. He lost. Oil stayed cheap, Horton was ousted, is cutting nearly 10% of its employees and cut its dividend 50% in August. Not for Royal Dutch/Shell the cut- backs at conservative Exxon, where boss Lawrence Rawl has reacted to the uncertainties by sharply curbing spending. Exxon has used its surplus cash to buy back stock--rather than for growth. ''Most people think this is a sunset industry. I don't see that at all,'' says Sir Peter Holmes, 60, chairman of the committee of managing directors as well as the man who speaks for the Anglo-Dutch group. ''We are in the prime of life. The opportunities are enormous.'' In hot pursuit of these opportuni- ties, earlier this year Royal Dutch/ Shell, with $103 billion in revenues in 1991, became the world's biggest public oil company, overtaking Ex- xon. The gap will widen, as Exxon pulls in its horns while Royal Dutch continues to grow. Analysts expect the company's oil and gas production to grow 15% from 1991 to 1995. That is on top of a 16% increase since 1988. Former oil giants Texaco, Chevron, Mobil, Amoco and BP are sliding far behind. Sir Peter's bullishness is reflected in the group's investment rate. It has kept up its massive capital spending-- nearly $12 billion last year--while others have retrenched. At that rate, Royal Dutch will almost double its petroleum asset base in five years. Wall Street is impressed. Morgan Stanley and other analysts forecast double-digit earnings increases well into the 1990s. Next year alone net income for the group should jump at least 20%, to reach $6 billion--equal to $7.28 per Royal Dutch share--as a turnaround takes hold at troubled Shell Oil, its U.S. arm. The behemoth now trades at about $86. Royal Dutch has other attractions as an investment. Its dividend (yield- ing 4.8%) is paid in Dutch guilders, so is a dollar hedge. And because it is a major holding for Dutch pension funds, it is virtually uncuttable. Royal Dutch can easily finance both the dividend and its hot growth. It has enough cash to pay off its entire $6.7 billion in debt--a minuscule 11% of total capital and by far the lightest debt load of any oil major. Last year it covered its entire $11.5 billion in capital spending from cash flow, despite break-even results for a third of its business-its $22 billion Shell Oil and the $11 billion chemi- cals business. Capital spending in the oil business is serious stuff. A planned new refinery in Guangdong, China will cost at least $3 billion. A single deep-water pro- duction platform in the Gulf of Mexi- co, the Bullwinkle project, which en- tered service in July 1989, cost half a billion dollars. A coker to get rid of residual tars at Royal Dutch's Deer Park, Tex. refinery and other im- provements will cost $1 billion. To marshal its resources in the face of these voracious demands for cash, Royal Dutch is shedding things that don't directly relate to oil. Hence the recent sale of its roughly $800 million U.S. coal operations to Zeigler Coal. Royal Dutch has also announced plans to put parts of its $13 billion (assets) chemicals business into a joint venture with Italy's Montecatini. It sold most of its Los Angeles refinery to Unocal and will joint-venture half of the Deer Park plant to Petroleos Mexicanos (Pemex). Expectations are that it will also exit from its Billiton bauxite and metals business. Although Royal Dutch is reluctant to talk about the subject, the compa- ny has, in effect, been pulling money out of its U.S. operations to finance growth elsewhere. The numbers speak for themselves. Since 1988 the U.S. share of Royal Dutch explora- tion and development spending has fallen from about half to a quarter of last year's $4.5 billion. The share of marketing investment has also shrunk. And although Shell Oil has barely broken even since 1990, Royal Dutch has upped its dividend take from its U.S. subsidiary to $750 mil- lion a year from $700 million in 1988. Milking the U.S. operations began in 1988, which just happens to be the year strong-willed John Bookout re- tired as Shell Oil chief executive. Book-out was the man at the helm of Shell when Royal Dutch bought out its public minority holders in 1985 (FORBES, Oct. 6, 1986). But Royal Dutch is only being real- istic. Increasingly onerous and fre- quently ridiculous U.S. environmen- tal requirements (FORBES, July 6) make doing business here increasingly less attractive. So far as production is con- cerned, the U.S. has been thoroughly picked over; many other parts of the world have not. In exploring for oil abroad, Royal Dutch has a clear advantage. It has just about the lowest cost in the industry for finding and de- veloping new oil and gas reserves, says Houston- based Sterling Consulting Group: $3.38 per equiva- lent barrel over the past five years, versus a $5.10 indus- try average. By the compa- ny's reckoning, this will be a continuing advantage be- cause it expects OPEC to hold oil prices down to dis- courage exploration in non-OPEC countries. Most of the hydrocar- bons Royal Dutch finds these days are natural gas, which is clean-burning but hard to sell from places like Brunei without having costly pipelines. Royal Dutch has been a master at liquefying and then shipping and marketing it to Japan-- often at double the price paid to U.S. gas producers. It is the world leader in liquefied natural gas, and Sir Peter foresees steady growth. He looks forward to Shell's new joint venture to develop the huge Russian gas reserves off Sa- khalin Island. This could cost $6 bil- lion and take seven or eight years to bring into production but should then be highly profitable. Currently the world uses only about half as many Btus of gas as of oil. And only 15% of that gas crosses international borders (4% as LNG), compared with half of the oil pro- duced. ''We'll see more gas volume and more of it crossing frontiers,'' says Sir Peter. Royal Dutch will be a winner here. Then there's a potentially exciting new Saudi connection. The oil indus- try has been buzzing about Saudi Arabia's proposal to invest more than $40 billion to increase crude produc- tion in anticipation of rising world oil demand. The Saudis are considering taking partners, provided they bring lots of technology. Sir Peter con- firmed to FORBES that Royal Dutch has been holding talks with the Saudis toward some form of participation. The payoff for Royal Dutch could be a management contract paid out in discounted crude. For all its skills at finding low-cost crude, it still buys more than two barrels of oil on the world market for every one it pumps itself. Royal Dutch has never been an owner of Saudi oil. But it has a foot in the door, since it built a huge refinery and petrochemicals complex at Al Jubail. Sir Peter speaks Arabic, though it's rusty, from his first posting in Su- dan. ''We'd love to get back in,'' says Sir Peter, ''but it is difficult.'' Sir Peter's weathered tan is the mark of a skilled and enthusiastic mountaineer. Mountaineering meta- phors come easily to him. He likens the oil business to mountaineering in the Alps. ''In good weather, even the less fit climb well,'' he says, his mind's eye on some distant remembered peak. ''When rain turns to snow, good climbers keep going. The mediocre turn back. The inexperienced have trouble surviving at all.'' It's snowing right now in the oil industry, but Royal Dutch clearly has no inten- tion of turning back. "This information is the property of Forbes, Inc., ACC takes no responsibility for its content, or the actions of any individual or institution, predicated on the information herin. Forbes Subscriptions are available to students and faculty members at the student/educator rate of $33 for one year, 27 issues. Regularly priced $52. Information about print subscriptions may be had by calling 1-800-888-9896. For further information about the electronic version of Forbes, contact usa@AmeriCast.COM"