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By John Kemp
LONDON, Feb 4 (Reuters) - "All political lives, unless theyare cut off in midstream at a happy juncture, end in failure,"wrote Enoch Powell, a former member of Britain's parliament whoheld controversial views on immigration and national identity.
Much the same could be said of business careers, as Shell's former chief executive Peter Voser has learned the hardway. His strategy of continuing to invest in complexmegaprojects through the oil industry cycle is now blamed forthe company's recent profit warning and underperformance.
In May 2013, when Voser's retirement was announced, he wasdescribed by Reuters as having been Shell's "renaissance CEO".According to my colleague Andy Callus, "his exit from a role heis seen to have excelled in surprised investors, analysts andpeople inside Europe's biggest oil company" .
Fast-forward eight months and Voser's successor stunned themarket with a profits warning. "Our 2013 performance was notwhat I expect from Shell," Chief Executive Ben van Beurden toldinvestors and promised a more disciplined approach to investmentas well as better operational performance and project delivery.
It was a remarkably quick fall from grace for both theformer chief and the company, though no swifter than many otherchief executives and businesses have endured.
FROM HERO TO FAILURE
Speaking to Reuters in May 2013, Voser warned: "You spendcapex through the cycle. Don't try to read it, don't slow down.It will cost you more when you want to grow afterwards.
"I know a lot of investors and analysts. They all think theycan read the market ... but one thing in our industry is veryclear; it takes you five to seven years to recover (from) astrategic slowdown," Voser explained.
"The market changes its views in three to six months, andyou can't change that fast in our industry."
Just a few weeks after Voser stepped down, Shell has finallysuccumbed to cyclical pressure. Van Beurden insists thecompany's overall strategy is sound, but has promised to cutinvestment and enhance returns by making hard choices about newprojects.
Shell's abrupt turnaround has prompted questions aboutwhether the company's strategy was mistaken, poorly executed, orif the company was the victim of changed circumstances beyondits control.
It has also prompted unflattering comparisons with BP, which emphasised spending discipline much earlier, andis now the darling of analysts and investors.
SIBLING RIVALRY
Contrasting the strategy, leadership, culture andperformance of the two London-listed oil majors is a favouritepastime of writers about both companies.
In the standard caricature, Shell is more conservative,bureaucratic, technology-driven and controlled by engineers. BPis reputedly more entrepreneurial, innovative, risk-taking andcontrolled by financially focused managers.
The two have regularly swapped places as the favourite ofthe media and investors over the last two decades depending onwhich set of characteristics is in fashion.
Legendary Chief Executive John Browne, who played a leadingrole consolidating the oil industry, pushing into post-communistRussia and building up a formidable oil trading division, madeBP the favourite in the late 1990s.
But in the wake of accidents like the Texas City refineryexplosion and Macondo well blowout in the Gulf of Mexico, BP'salleged lack of engineering expertise, reliance on externalcontractors, obsession with short-term financial results, andcriticism of its safety procedures, drew adverse comparisonswith Shell's boring but predictably safe operations.
BP suffered a near-death experience following the 2010 Gulfoil spill, and is still paying out tens of billions of dollarsin fines and compensation.
But Shell too has had its ups and downs. The company's Pearlgas-to-liquids project in Qatar has proved to be enormouslyprofitable. Shell's advanced engineering is admired across theindustry. And Shell was the first of the major oil companies toexploit the shift from oil to gas.
But the company's misstatement of its proven reserves earlyin the century landed it with a multi-million dollar fine fromstock market regulators and forced the departure of its chairmanas well as shocking investors. Shell has had its ownenvironmental problems in Nigeria. Now it is being severelycriticised for overspending.
SIMILAR RETURNS
In practice, the long-term performance of the two companieshas been remarkably similar. The attached chart shows the shareprice performances of Shell and BP since 1994 ().
At times, BP has outperformed its more staid rival, but itsshares have also been much more volatile, and the two companies'performance over the whole period has ended up remarkablysimilar.
If reinvested dividends are taken into account, the totalreturn on Shell's shares has averaged 8.64 percent per yearsince 1994, only marginally less than the 8.96 percent return onBP shares. Which company comes out ahead is sensitive to theperiod chosen for analysis, suggesting underlying performance isbasically indistinguishable.
That is not really surprising. Both companies face the samefundamental forces - including exploration and developmentcosts, political risks, price risks, and technology challenges.
The fact the two companies' financial performances have beensimilar over the long term suggests the fundamentals they havein common are more important than the cultural, strategic andleadership factors that differentiate them.
Journalists, financial analysts and investors tend to focuson human factors like strategy, leadership and culture becausethey make for a more interesting story. But the fundamentalfactors the two rivals have in common are probably moreimportant in explaining medium and long-term performance.
FICKLE FASHIONS
Voser was right to observe that in a capital-intensiveindustry like oil and gas it makes no sense to keep changingspending and investment plans in response to short-term demandsfrom investors and analysts. But he was most definitely wrong tothink the market would reward Shell for taking a rationallong-term view.
Nearly all political, business and financial careers end infailure and recriminations because as they mature leaders becomemore rigid, less adaptable, and less open to new thinking, andthey must live with the consequences of past decisions whencircumstances change.
The only leaders to escape with their heroism intact tend tobe those who leave early before the external environment shifts.Voser retired early but he was unlucky to do so just as theindustry's investment climate was turning.
Shell's strategy was not wrong, and it certainly was notworse than BP's, however it was not well aligned to theprevailing phase of the cycle, and the company did not adaptquickly enough to keep investors and commentators happy.
But the cycle will keep on turning. In a few years BP willbe out of favour again, and everyone will be writing about howShell is a much more solid and reliable performer, with a goodlong-term investment portfolio, and crediting its lucky CEO.
