Eroding market appetite for Royal Dutch Shell (LSE: RDSB) picked up speed in recent weeks thanks to the unravelling Chinese economy, and the business has seen its stock price sink 12% since the start of August, striking out at fresh five-year lows around £15.85 per share in the process.
Shell has shed a staggering 37% of its value since Brent’s alarming slump kicked in last summer, and although a recovery in the black gold price helped the firm recover some ground at the start of the year, a stream of worrying industry news items since then has sent prices in both commodity and company scurrying lower yet again.
But I do not believe Shell has yet seen the worst of it. The City currently expects the oil producer to endure a 31% earnings slide in 2015, resulting in a P/E multiple of 12.5 times. Although by no means a terrible reading — on paper, at least — I believe a reading closer to the bargain benchmark of 10 times would be a fairer reflection of the long slog Shell has in front of it.
Consequently I reckon the fossil fuel giant should be changing hands at £13.49 per share, representing a huge 17% drop from current levels.
Bad news keeps on coming
A huge decline in the US rig count was responsible for the oil price recovery earlier this year, but a confluence of worrying developments — from insipid demand data through to OPEC determination to keep the pumps switched on — has rattled investor nerves since then. And recent data from Baker Hughes has showed that US shale operators are gradually getting back to work, adding to existing fears as output from the country’s most lucrative oilfields surges.
Baker Hughes’ latest set of numbers on Friday showed the rig count fall by an 13 units in the past week to 662. But this marks a rare ray of sunshine, with rig numbers having climbed for the previous six weeks in a row. Meanwhile, latest data from the US Energy Information Administration last week showed inventories rise by some 4.67 million barrels, the largest rise since April and pushing the total back towards multi-decade highs around 455.4 million barrels.
Earnings to keep on crumbling?
Given these worsening fundamentals, it is highly likely that the number crunchers will begin taking the red pen to their existing forecasts for Shell, suggesting that my £13.49 per share figure could still be considered too heady.
Shell saw earnings on a constant cost of supplies basis slide by a third during April-June, to $3.4bn thanks to the tanking oil price — indeed, upstream earnings tumbled 80% to just $774m from the corresponding 2014 period. And while the firm’s decision to axe another 6,500 from its global workforce is welcome in the current climate, it is a further indication of the upheaval facing the oil and gas sector.
With oil prices still locked in a steady downtrend — the commodity struck six-and-a-half-year lows below $43 per barrel last month — and brokers steadily cutting their forecasts for this year and beyond, I believe investing in the likes of Shell remains a high-risk business that savvy investors had best avoid.