Royal Dutch gives cause for concern

Taking Stock

Your Money

April 18, 2004|By ANDREW LECKEY

I OWN SHARES of Royal Dutch Petroleum Co. and am concerned about what's happening with this company.

- L.M., via the Internet

Your concern is justified, since this international oil giant acknowledged this year that it overstated its proven petroleum and natural gas reserves by 20 percent.

Proven reserves, the amount of crude and gas an oil company estimates it can extract and sell, are a measure of future performance. At Royal Dutch, large executive bonuses were tied to the booking of such reserves.

Royal Dutch ousted its chairman and head of production because of the accounting scandal and has become the subject of investigations by the Securities and Exchange Commission and Justice Department.

Making matters worse, Royal Dutch more recently restated oil reserves for the second time this year primarily because of problems in its reporting of a Norwegian field. It was a smaller, yet embarrassing, error that meant it had to delay its annual report until the end of May.

Royal Dutch shares are down 12 percent this year after last year's 25 percent gain. Royal Dutch has missed Wall Street earnings estimates five of the past six quarters, at a time when other major oil companies were exceeding them.

Nonetheless, Royal Dutch remains a global energy powerhouse with a solid balance sheet, streamlined operations and shares that are reasonably priced. Its enormous size and low exploration costs make it a strong partner for emerging international production deals, such as its $5 billion liquefied natural gas project in Qatar. It is benefiting from high energy prices, and OPEC has the goal of further boosting industry profitability.

Royal Dutch has a 60 percent interest in Royal Dutch/Shell Group, which is one of the world's three largest integrated oil and gas companies and has a presence in more than 145 countries and territories.

British firm Shell Transport owns the other 40 percent. The structure of the oil company and its holding companies is complicated and somewhat unwieldy.

Amid all the uncertainty, the analyst consensus on Royal Dutch shares is a "hold," according to the Boston-based Thomson First Call research firm. The range of opinions includes three "strong buys," four "buys," nine "holds," five "sells" and one "strong sell."

Royal Dutch earnings are expected to decline 3 percent this year vs. a 7 percent decline forecast for the major oil group. Next year's projected 7 percent decrease compares with a decline of 9 percent expected for its peers.

The prediction of a five-year annualized gain of 10 percent beats the industrywide expectation of 8 percent.

What are the rules governing withdrawals from a converted Roth individual retirement account? Are the rules different depending on whether you are over 59 1/2 years old?

- J.P., Allentown, Pa.

Here are key aspects of the Roth IRA, in which there are no tax-deductible contributions but earnings accumulate tax-free:

Contributions can always be withdrawn at any time for any reason free of taxes and penalties. However, there are restrictions on withdrawal of earnings on those contributions.

Converted funds are never taxed because you paid tax on them. However, if you're younger than age 59 1/2 , you have to hold converted funds in a Roth IRA for five years or pay a 10 percent penalty.

You are never charged a 10 percent penalty for withdrawals after age 59 1/2 .

"The next important consideration in withdrawals is which money is the converted amount, which money is earnings and therefore which money comes out first," said Ed Slott, CPA and publisher of Ed Slott's IRA Advisor ( in Rockville Centre, N.Y. "The law has `ordering' rules in which contributions come out first, then converted funds and then earnings."

If all you have are converted funds and earnings, the converted funds come out first, Slott said.

I have heard good things about Calamos Growth Fund, and I'm thinking about investing in it. What's your opinion of this fund?

- P.G., via the Internet

It has a top-notch management team that has proved capable of directing this fund through any sort of market environment.

The Calamos shop, based in Naperville, Ill., first developed expertise in convertible bond investing. It uses a quantitative model to search for fast-growing companies that it believes will beat analysts' expectations. Cash flow, capital invested in the business and stock price are prime considerations.

The $5.4-billion Calamos Growth Fund is up 44 percent over the past 12 months to rank in the top 18 percent of mid-cap growth funds. Its three-year annualized return of 8.5 percent puts it in the top 7 percent of its peers.

"Researching convertibles helped its management learn a lot about equities and the credit structures and financial details of companies, which has helped out in the growth investing category," said Kerry O'Boyle, an analyst with Morningstar Inc.

"A downside is that the fund's expense ratio has remained high, at 1.4 percent."

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