Business

Neil Collins’ Notebook: Just an Empty Shell

BY Neil Collins   /  2 October 2020

Ben van Beurden is sorry: “It is very painful to know that you will end up saying goodbye to quite a few good people.” Well, not that sorry: the decision to axe between 7,000 and 9,000 of these good people is buried at the bottom of this week’s third-quarter update from Royal Dutch Shell, after the usual bewildering guff like “The CFFO can be impacted by margining resulting from movements in the forward commodity curves up until the last day of the quarter.”

Indeed, the CEO’s rather stilted regret is not even in the statement, but a long way down a cheesy interview on the company website. Rather further up the interview is a sort of Bob the Builder exhortation: “Can Shell transform? Yes. And we will.”

The trouble is, nobody can be sure what Shell will transform into, only that Mr van Beurden is trying to turn an oil company into something else, and that it will be eye-wateringly expensive. His record at forecasting hardly inspires confidence. Five years ago, when Shell overpaid handsomely for BG Group (to get its oil reserves) Mr van Beurden justified the price by claiming that it secured the dividend for years ahead.

Not that many years, it turns out. The debt taken on to pay for BG now threatens the balance sheet, so the board slashed the payout in a Covid-induced panic in March. That supposedly rock-solid dividend was the reason why so many of us held Shell shares even if (like the analysts) we frequently found the other numbers incomprehensible.

Now we are promised more asset write-offs, and this “transformation.” A braver board would understand that these things are expensive and the returns highly uncertain, and that Shell’s core competence is in oil and gas, neither of which is going to disappear.

A smaller business that focused on exploiting low-cost reserves might begin to repair that butchered dividend and halved share price. It could start with another redundancy, that of a CEO who has exhausted his credibility.

Wiring diagram

The Wirecard story is the gift that keeps on giving. Germany’s biggest-ever collapse has turned into the teutonic equivalent of Theranos, and a book and movie rights are surely not far away. This week the Financial Times has written another chapter, with evidence that EY, the Wirecard auditor, was warned by one of its own employees of possible fraud four years ago, but continued to give the company a clean bill of health.

As the FT reveals, Wirecard’s contacts ran right up to the German Chancellery, and right up to the moment when the carefully-constructed edifice came crashing down.

Long before it did, Neil Campling at Mirabaud Securities had been the only analyst with a “sell” recommendation on the stock (his target price: zero) and the FT’s Dan McCrum had put his career on the line with the paper’s revelations. His articles produced the most bizarre response from BaFin, the German financial regulator; rather than investigating the allegations, it filed a criminal complaint against two FT journalists.

As if to show just how teutonic the regulator is, BaFin’s president Felix Hufeld is now arguing that under German law BaFin did not itself have the right to launch a special audit of Wirecard’s accounts, but could only refer the matter to an obscure, private sector outfit called the Financial Reporting Enforcement Panel. This is a pitiful excuse for any self-respecting regulator. Wirecard had collapsed before the panel produced any results.

The damage is still continuing, but it is not only BaFin that has much further to go. EY’s global chairman Carmine Di Sibio has written to clients claiming that EY was ultimately “successful in uncovering the fraud”. This is a bit rich, but perhaps serves as a first line of defence against the inevitable legal actions the auditor will face. This is a €1.9bn fraud, a size big enough to pose an existential threat to EY, so any attempt at damage limitation is understandable.

Wirecard was Germany’s only significant tech company and a member of the Dax30 index, while its collapse exposed the country’s financial regulator as a paper tiger. The British government’s astonishing mismanagement of Covid is making us all poorer, but there is nothing like the misfortunes of others to cheer us up. The Germans have a word for this: shadenfreude.

Starting our descent

Two weeks ago I suggested here that the risk of shares in British Airways’ owner IAG falling below the 92p rescue rights price was trivial. The legion of bankers would earn £70m in fees for little more than producing a 258-page prospectus for the €2.74bn capital raise.

Well, the underwriters may yet escape, but it’s going to be close. From 163p when the issue was launched the shares have slumped to 95p (ex-rights). Goldman Sachs, Morgan Stanley, Deutsche Bank and Rothschilds may yet find themselves reluctant holders. As the old saw has it, forecasting is always difficult, especially for the future. They still get the £70m, though.


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