Bad news continues to gush from Royal Dutch/Shell ( SC).

For the second time this year, Shell has cut the proved reserves that measure the company's health. The oil supermajor, which triggered public outcry and government probes with a huge writedown in January, announced a second revision -- with the possibility of more -- on Thursday. The company cut its 2002 reported reserves by 250 million barrels of oil equivalent and expects to trim its 2003 reserves by 220 million more. It has now slashed its proved reserves by 21% this year and, following the completion of an independent review, could announce further cuts in the weeks to come.

In the meantime, the company has delayed both its 2003 10-K filing and its shareholder meeting until this summer.

"Things are going from bad to worse for RD/Shell," wrote Merrill Lynch analyst Mark Iannotti, who has a neutral rating on the stock. "Enough already."

Iannotti sees "plenty of risk" in the ongoing Shell saga. But he nevertheless feels that investors may have overreacted to the latest news. The stock, which slid 4% as Iannotti penned his report overseas, fell only 8% when the company announced its much larger revision in January.

Stocks of the combined company weathered smaller hits on Wall Street. Royal Dutch slipped 1.7% to $47.51, while Shell fell 1.5% to $40.45 on Thursday.

Goldman Sachs analyst Matthew Lanstone stopped short of recommending the shares on Thursday's weakness.

"We view this latest reserve problem as symptomatic of a company in the middle of an ongoing crisis, unlikely to clear itself in the short term," explained Lanstone, who has an in-line rating on the stock. "While we continue to see value in the shares for the longer term, we cannot see positive catalysts" right now.

Credit Suisse First Boston analyst Mark Flannery sees long-term problems as well. Although he, too, has a neutral rating on Shell, he was already steering investors toward competitors -- such as BP ( BP) and ChevronTexaco ( CVX) -- even before Shell's latest writedown.

"The problems at the company are deep and very much in place: no volume growth, low return on capital and low reserve life," Flannery stated.

Shell has seen its reserves wither at a particularly inopportune time. Its reported assets are falling just when high oil prices would make them even more valuable. Its ability to grow its asset base is hampered as well.

Simply put, Shell is unlikely to acquire new properties with oil trading at a 13-year high of $38 a barrel.

"The new chairman indicated that corporate acquisitions appear unlikely in the short term," Flannery recalled. "He stated that ... given the current high oil price, acquisitions look expensive at the moment."

Shell faces additional burdens as well. The company's huge reclassification has sparked government probes by agencies in the Netherlands, the U.K. and the U.S. The furor surrounding the changes has also pressured the company to enhance the transparency of its results going forward.

"External regulations ... are becoming generally more stringent in the areas of governance, compliance and transparency," the company announced on Thursday. "Initiatives were already underway within Shell to respond to these developments. But reviews have highlighted the need for Shell to accelerate this work."

In the meantime, those reviews have already turned up problems. Specifically, the company has determined that it cannot properly book most of the reserves tied to a big project in Norway. It reached that conclusion during an independent "fast-track" review of certain fields covering less than half of Shell's portfolio. It expects a full, in-depth review of its portfolio to end late next month.

Defensive Shell
Writedowns whack stock

Iannotti, for one, remains unsure about what to expect.

"Is this the end of the reserves classification?" he pondered on Thursday. It's "difficult to say. However, we would hope that the bulk of reserves have now been identified and reclassified."

Shell itself indicated that better news could be coming down the road.

"These have been challenging weeks for the management of Shell, just as they have been very disappointing for investors," acknowledged Shell leader Jeroen van der Veer. "The management of the group is committed to the highest standards of integrity and to building on the strong positions and assets -- and outstanding staff -- that we are fortunate to have. Our focus in 2004 is on ... delivering our business plans and targets."

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