Shell's proposed reorganization promises increased value and a better focus on developing reserves and increasing production. Still ahead is more work on the way it audits reserves and reports on them.
The Anglo-Dutch oil group's proposal to form one company, with one board and a real CEO, addresses concerns that its complex dual corporate structure has hindered efficient management and accountability to shareowners.
"We commend Shell for responding to our concerns by vastly improving its management structure and lines of accountability," said Sean Harrigan, President of CalPERS. "These steps should make Shell more responsive to the long-term interests of its shareowners. Down the road, Shell also can and should lead the industry forward by raising the bar on how it audits and reports its assets."
"Shell has had the largest part of its reserves reviewed by independent outside consultants this year, and it would be natural and advantageous for Shell to have its proved reserves fully audited" said Eric Knight, Managing Director of Knight Vinke Asset Management. "If Shell agrees to an external audit of its reserves, this would strongly encourage others in the industry to do likewise and would help to eradicate inconsistencies in the application of the SEC's standards – such as those which have emerged at Ormen Lange, for example -- that have undermined the market's confidence in the sector."
CalPERS and Knight Vinke also hope that Shell and its peers will improve disclosure of longer term reserves which do not yet qualify for 'proved' status but are essential, nevertheless, in determining valuation.
"Shell also has the opportunity to impose upon the industry a more consistent application of standards governing the way 2P or 'expectation' reserves are calculated -- by being the first to publish this information and the way it is calculated in greater detail", Knight said. Oil companies use 'proved and probable' (2P) reserves rather than the U.S. Securities and Exchange Commission's narrow definition of 'proved' (1P) reserves when they value each other. "Performance metrics such as the reserve replacement ratio (RRR) and reserve life are meaningless when calculated solely on the basis of 1P reserves. Shell's reserve life, calculated in terms of 2P reserves, appears to be fully in line with that of its peers", Knight added.
CalPERS and Knight Vinke also urged Shell to use its very significant surplus cash flows from current high oil prices to resume stock buybacks and otherwise improve value for shareowners. For the past nine months, CalPERS and Knight Vinke have been amongst the leading voices calling for change on governance issues at Shell.
CalPERS made a $200 million investment last year in Knight Vinke Institutional Partners, a fund managed by Knight Vinke Asset Management, New York, that invests in sound but underperforming public companies where sub-optimal stock market or operating performance can be attributed in some way to poor governance, broadly defined, and works closely with institutional and other shareholders, as well as management, to overcome or redress these problems.
CalPERS is the largest public pension fund in the United States, with more than $168 billion in assets. The system provides retirement and health benefits to more than 1.4 million State and local public employees and their families. For more information on CalPERS, visit www.calpers.ca.gov.
