It comes as little surprise that Shell (LSE: RDSB) and Glencore (LSE: GLEN) have received the wrath of the markets during 2015. The FTSE 100 giants have seen their share prices haemorrhage 34% and 73% of their value respectively since the turn of January as commodities prices have tanked.
With energy and metal prices striking levels not seen since the 2008/2009 financial crisis, the City is naturally convinced that both firms will to rack up huge earnings falls in 2015. Glencore is expected to endure a 61% bottom-line slide this year, while Shell is predicted to punch a 40% decline.
Still, the number crunchers believe both firms are on the cusp of a solid recovery following 2015’s annus horribilis — Shell is expected to enjoy a 7% bounceback next year, with its sector peer projected to enjoy a stonking 19% earnings rise.
A bumpy year ahead
But I for one am far from convinced that either Glencore or Shell are primed to enjoy a splendid recovery any time soon.
Just this week Brent oil struck fresh six-and-a-half-year nadirs around $37 per barrel, and further falls could well be on the cards. Industry cartel OPEC — which is responsible for four-tenths of global supply — continues pumping at levels not seen for years, while insipid global demand fails to put a dent in bloated inventories.
Indeed, Goldman Sachs claimed again today that ‘black gold’ prices may fall as low as $20 before producers are encouraged to get to grips with rebalancing the market. Such a scenario naturally bodes ill for Shell — the company clocked up a $7.4bn net loss between July and September thanks to falling oil values.
And Glencore’s diversification does not offer it much comfort in the current environment, either, thanks to the same chronic supply/demand discord across all of its major commodity classes. Three-month copper futures remain perched above multi-year troughs at $4,550 per tonne, while zinc, nickel, coal and aluminium have all printed fresh lows in recent weeks.
On top of this, the likelihood of further strengthening in the US dollar, prompted by additional interest rate rises by the Federal Reserve, threatens to heap further pressure on the greenback-denominated commodities in 2016 and potentially beyond.
Capital boosts curtail earnings recovery
In a climate of collapsing commodity prices it seems prudent for both Shell and Glencore to batten down the hatches and conserve cash, of course.
Shell has kept on slicing its near- and medium-term capex budgets in 2015; expensive projects like those in the Arctic have been shelved; and billions of dollars worth of assets have been placed in the chopping block.
Over at Glencore, copper, nickel and agricultural assets have all been placed on the market in recent months, while hefty spending cuts have also been introduced. Glencore has also been forced into a rights issue as well as cutting the dividend to bolster its balance sheet.
But massive spending scalebacks and asset sales clearly do little for either Shell or Glencore’s long-term earnings outlooks, leaving the firms at the mercy of sluggish growth once commodity prices eventually turn higher.
And with further action likely as commodity prices continue to sag, I reckon both resources giants offer little incentive for growth-hungry investors to pile in.