* Profit warning followed legal advice on fair disclosure,Shell says
* Negative factors flagged in Oct "more negative than weexpected"
* Motive was not new boss grandstanding or miss againstforecasts
* Analysts say no guarantee all Q4 problems are short term
By Andrew Callus
LONDON, Jan 21 (Reuters) - Royal Dutch Shell's chief executive Ben van Beurden has, on the face of it, playedthe classic "new boss" card - using a barely justified profitwarning to brighten his own future by making the past look bad.
The truth is quite different, the energy company says, andpossibly far more worrying for investors.
Three trading days after van Beurden's warning last Fridaythat quarterly net profit will fall far short of expectations,Shell's shares are barely down 1.5 percent in a flat market.
But while circumstances conspired to make the fourth quarterparticularly bad for Shell, there is no guarantee that the groupwill bounce back this year. Van Beurden, some shareholders say,must do more than tighten up a bit and sweep away a few cobwebswhen he reveals his strategy in March.
A fortnight into his tenure, the Dutchman broke atraditional pre-results silence at Europe's biggestinvestor-controlled oil company. Pre-empting the officialannouncement on Jan. 30, he revealed numbers showingOctober-December last year was Shell's worst quarter since 2009.He also called the whole 2013 performance "not what I expectfrom Shell".
Few commentators and analysts failed to connect the rhetoricwith the fact that removal boxes have scarcely been cleared fromthe boss's office in The Hague. Using such warnings, new chiefsfrequently try with varying degrees of subtlety to shift theblame for a company's problems on to the past leadership, andlower expectations for their own tenure.
"It's standard practice, but this was done verytransparently, and that's high risk," said a person who has deepexperience of corporate presentation strategies, but was notinvolved. "Everyone knows the game he is playing."
At $2.9 billion for adjusted earnings on a current cost ofsupply basis, the fourth quarter net profit figure van Beurdengave was well below market expectations of around $4.0 billion.But misses like this are common in the energy industry, andrarely have a significant or long-lasting impact on investorsentiment. Profit warnings to flag them are also rare.
Shell missed forecasts just as badly in the second quarterlast year, making a $4.6 billion profit compared with analysts'average prediction of $5.7 billion. That time it did not alertshareholders in advance. Neither did it when profits beatestimates by a similar amount in the first three months,making$7.5 billion versus the $6.5 billion forecast.
Some of Shell's rivals have also produced surprises in thepast two years, with results both above and below expectations.
Executives and investors alike insist that quarterly andeven annual performance is a poor measure of an industry thatworks on much longer investment timescales. Some also questionthe quality of forecasts made by analysts at brokerages andinvestment banks.
The rest of van Beurden's statement went over old ground,citing "weak industry conditions in downstream oil products,higher exploration expenses, and lower upstream volumes".
For the oil and gas production division - the main driver ofprofits - van Beurden said there had been a high level ofmaintenance activity during the quarter in high value productionareas, including the Pearl Gas to Liquids (GTL) plant in Qatar,and in Liquefied Natural Gas (LNG).
Security in Nigeria continued to be "challenging", he said,U.S. operations remained lossmaking, and currency factors inAustralia had worked against the company.
All of these factors had already been flagged by financedirector Simon Henry at the end of October, in some detail.
"Our focus will be on improving Shell's financial results,achieving better capital efficiency and on continuing tostrengthen our operational performance and project delivery,"van Beurden promised, using words his predecessor, Peter Voser,would recognise.
DEEPER WORRY
So much for appearances. Shell had deeper concerns,according to Andy Norman, the company's Vice President MediaRelations. His comments set against the limited market reactionsuggest management is far more shocked than investors have beenby the scale of the downturn.
Shell says the warning was dictated neither by analysts'average or "consensus" forecast nor the new leadership."Consensus was not a factor in the announcement," Norman toldReuters, adding: "These decisions are made by clear accountingrules. They're not influenced by senior executive changes.
Norman acknowledged that when Shell announced its thirdquarter results it flagged operational factors that were likelyto make the rest of the year tough. "While this operationalguidance was correct, the factors turned more negative than weexpected during the quarter," he said.
"At $2.9 billion, Q4 earnings are expected to be well belowthe $5-7 billion range we've typically seen in most quarters inrecent years. After taking legal advice we concluded we had anobligation to disclose the Q4 numbers as soon as possible inorder to comply with stock exchange rules on fair disclosure."
How much the fourth quarter problems persist is crucial, according to Oswald Clint, analyst at Bernstein. "It may be thateverything went against Shell this quarter but it doesn't meanit will bounce back next quarter either," he said.
Even before Friday's statement, investors were increasingly expecting radical action from van Beurden, who was promoted tothe post on Jan. 1 after Voser's surprise early retirement. Hehas his chance at a strategy day on March 13.
"The market's not going to judge him on this (statement),but they will be disappointed if - come that first managementstrategy day where he stands up and gives his vision - it's alla bit more of the same, a bit of tightening up and sweeping awaya few old cobwebs," said a British-based institutionalshareholder who asked not to be named. "That's not going to beenough."
Some analysts and investors advocate a gradual structuralmove towards high-margin LNG, and away from moribund refining -a departure from the traditional integrated oil model which theyhope might highlight the value in Shell's market-leading LNGposition. Others want to go in that direction more quickly.There has also been talk the underperforming U.S. business maybe jettisoned entirely.
BEURDEN OF RESPONSIBILITY
Leaving aside more radical measures, van Beurden's task istricky - not least because this week he lost his head ofinternational upstream operations, Andy Brown, for anunspecified period of medical leave.
Van Beurden has little room for manoeuvre in an industrythat has to invest 10 and 15 years ahead, yet must satisfyshareholders with a much shorter attention span.
"I'd be surprised if you were looking at radical changesbecause an awful lot of the project pipeline - stuff that takesyears to put together - it's not easy to move that around," saidVTB Capital analyst Colin Smith.
Shell's net investment spending - money flowing out - was$44.3 billion in 2013. Cash flow from operations - money in -was $40.4 billion. Those two numbers broadly reflect level orfalling output and prices set against rising costs, and theyshow that Shell effectively "burned" nearly $4 billion lastyear. Shareholders fear for their $11 billion of annualdividends as a result, and Shell has been seen as the leastattentive of its peer group to this industry-wide concern.
Returns on investment data going back to April 2010 show thecompany underperforming three out of four of its main rivals -the fourth being BP, which took a direct hit from theGulf of Mexico oil spill in that month.
Lately though, like its peers, Shell has promised thatcapital spending has peaked. Its move to abandon a GTL projectin the United States and likely abandonment ofits Arrow LNG project in Australia are signs ofthose efforts. Also falling into line with its rivals, Shell haspromised to step up asset sales, an action which both brings incash and cuts outgoings.
Shell has a four-year net investment target of $130 billionfor 2012 to 2015. Including $30 billion spent in 2012 and $44.3billion in 2013, it spent over $74 billion in the first twoyears. That leaves less than $23 billion a year for 2014 and2015, $20 billion short of 2013's budget.
If van Beurden is going to meet that target - and some sayhe will dump it either on Jan. 30 at the results day or at theMarch strategy day - he will have to make up that gap through$20 billion a year-worth of asset sales, project-abandonment,and other cost saving measures.
