The world's second-largest oil company, Royal Dutch/Shell -- represented by two stocks, Royal Dutch
According to the company, "With respect to the reserves recategorization announced earlier in 2004, it is important to note that we identified the issue, disclosed it, and are taking steps to address it." Oh, your action is noted, but something still smells wrong.
Is it right that Chairman Philip Watts kept his job? "Reserves" are reported to the Securities and Exchange Commission. Something smells fishy when, between 1996 and 2003, 20% gets incorrectly classified as "proven" -- the most valuable of reserves.
And it's little consolation that "the Group has made, and is continuing to make, significant enhancements to the internal controls surrounding the booking and reporting of reserves at all levels of the organization." It sounds like Royal Dutch is building the barn around a cow that escaped hours ago. Why isn't someone out of a job for not doing this for years?
Other major oil companies are separating themselves from Shell. ChevronTexaco's
Even smaller (but still big) companies such as Anadarko Petroleum
The legal community smells an opportunity; class action lawsuits are popping up every day. The defense lawyers will contend that Royal Dutch/Shell shareholders knew about oil price volatility and political risks. Should they have known -- or even imagined -- that proven reserves reported to the SEC were systematically overstated?
One factor to consider when evaluating a stock is management. In Royal Dutch/Shell's case, deflating the reserves by 20% -- and the attendant loss of trust -- deflated the stock almost 20%. Shareholders paid a real price. The executive team behind this fiasco is still in place. In my book, that stinks.