( RD) continues to hold its title as the black sheep of the oil industry.
With other supermajors -- such as
-- galloping past Wall Street expectations, Royal Dutch/Shell looked like a different beast entirely when it reported another earnings miss on Thursday. The Anglo-Dutch oil giant, which recently stunned investors by
slashing its proved reserves, has served up a fresh disappointment by falling short of fourth-quarter profit estimates and warning that production will actually decline -- rather than hold steady -- in 2005 before it finally rebounds the following year.
Morgan Stanley analyst Irene Himona immediately noted the company's shortcomings.
"This is about the fifth quarter out of the last six that Shell has missed estimates," wrote Himona, who has an equal-weight rating on the stock. "We note the contrast yet again with the peer group of U.S. majors who typically beat consensus by a margin."
For the full year, Shell did manage to grow full-year profits by 35% to $12.7 billion with help from higher energy prices. But Himona pointed out that Shell's fourth-quarter profits of $1.86 billion -- down nearly 20% from a year ago -- fell 10% shy of market expectations. She blamed the company's refining and marketing division, which struggled outside the U.S., for much of the disappointment.
Meanwhile, Merrill Lynch analyst Mark Iannotti found little to celebrate as well. He did note that the company's chemicals division "handily beat" his fourth-quarter expectations. But the larger units simply met -- or fell short -- of his targets.
"Overall, a fairly disappointing set of results," Iannotti wrote, "particularly given that Exxon-Mobil and ChevronTexaco last week beat the market consensus by 15% and 8% respectively."
Shares of both Royal Dutch and Shell, which trade separately, slipped on Thursday morning. Royal Dutch fell 24 cents to $47.31, while Shell -- responsible for last month's big writedown -- dropped 51 cents to $40.12.
Shell came under fire early this year after slashing its proved reserves by 20% and offering little explanation to the investment community. The company offered a bit more color on Thursday -- most notably expanding the writedowns to regions outside Australia and Nigeria -- but some analysts still felt shortchanged.
Shell's chief of exploration and production, rather than embattled Chairman Philip Watts, is hosting a more detailed presentation today. But for now, Iannotti said, Thursday's earnings release provides just "a little more clarity" on the situation.
"The key takeaway is that 95% of the revision is classified as a reduction in proved underdeveloped reserves, a statistic that highlights the problem largely stems from historically over-ambitious expectations of commercial development rather than flawed technical analysis on the field reserves themselves," wrote Iannotti, who has a neutral rating on the stock. "Nevertheless, exactly why large uncommercial gas resources ... were booked well before commerciality remains, in our view, inexplicable and highlights again that we believe this reserves writedown will prove to remain a RD/Shell-specific issue that stems from the company's internal management processes over the last several years."
Following ongoing discussions with the
Securities and Exchange Commission
, the company said on Thursday that it expects to amend its 2002 reported reserves but anticipates "no material impact for any year" at this point.
Elsewhere in the sector, struggling
took a major -- if anticipated -- step away from the merchant energy business. The Florida-based utility said it plans to sacrifice its $1 billion-plus investment in two money-losing merchant projects rather than wait for a market recovery. Teco will essentially hand the assets over to lenders who have forgiven violations to the company's credit agreement for months.
Teco delayed its fourth-quarter earnings release, originally scheduled for today, until Monday so that it can make accounting changes necessitated by the discontinued projects. In the meantime, Teco CEO Robert Fagan described Thursday's decision as "the most significant step in our back-to-basics strategy" of focusing on the company's core utility business.
"I believe that, over the long term, these plants will provide good value to their ultimate owners," Fagan said. "Unfortunately, in the interim, we cannot continue to support these plants."
Standard & Poor's, which rates Teco's credit just one notch above junk, quickly embraced the move as a "favorable" one. Still, the ratings agency cautioned that challenges remain.
"The company must execute on its stated plant dispositions, effectively manage its remaining business lines and deliver results consistent with projections," noted S&P, which maintained its negative outlook on Teco's debt. "Any deterioration in the company's remaining business units would severely pressure current ratings."
Already, Teco plans to take a $780 million after-tax impairment charge on the abandoned Union and Gila power assets. Although Teco will remain in compliance with debt-coverage ratios, its balance sheet is clearly stretched. And Moody's has already warned that further writedowns -- beyond those that have ultimately been announced -- could trip covenants going forward.
Even so, most analysts were hoping to see Teco take the current hit, at least, and move on.
"While one can make an argument that the plants offer an option for when the commodity cycle finally turns around in the long term, the outlook for the next few years would be dramatically improved if Teco were to walk away from the merchant projects," Merrill Lynch analyst Steve Fleishman wrote last month. "However, the poor leverage and coverage ratios and rating agency pressures could lead to a capital markets transaction to restore the balance sheet."
For now, Fleishman has assumed no stock dilution or cut to the dividend in evaluating the company. But he still views Teco's stock as overvalued, saying it is worth $13 a share at best. The stock nevertheless jumped 2.6% to $14.32 on Thursday's long-awaited decision.
slid -- falling 1.5% to $8.84 -- on disappointing fourth-quarter results. The company's quarterly loss did shrink from $5.08 a share last year, to 71 cents a share in the latest period. Excluding special items, however, the company's 1-cent profit fell 3 cents shy of the consensus estimate.
Still, the company did offer some good news. It expects to generate operating profits of 62 cents a share -- a penny better than current estimates -- in 2004. And it indicated that its biggest challenges are behind it.
"We have met our financial restructuring and performance goals for 2003," AES CEO Paul Hanrahan said. "We enter 2004 a stronger company with increased financial flexibility. ... This sets the stage to leverage our strength for disciplined growth in attractive markets going forward."