The oil sector has proved a rather unhappy hunting ground for investors since Brent values started to topple from 2014’s summer highs of $115 per barrel.
Industry leviathan Shell (LSE: RDSB) has seen its stock haemorrhage around half its value since then — the stock hit eight-year lows around £12.27 per share in January as oil prices tanked below $30, the commodity plumbing to levels not seen since 2003.
So at what point can hardy investors in the fossil fuel colossus expect share values to turn around?
Data keeps on disappointing
Well, sentiment surrounding the oil sector is likely to remain weak as chatter of a fresh implosion in the global economy heats up.
Economic data from China this week certainly gave more cause for markets to be fearful. Latest trade numbers revealed an 11.2% decline in exports and an 18.8% fall in imports year-on-year in January. And crucially for Shell, oil imports slumped 20% from December and 4.6% from January 2015, to 26.69m metric tonnes.
The People’s Bank of China’s failed attempts to revive the economy isn’t the only worry for Shell, of course. Worsening political fault lines across OPEC — home to 40% of global supply — are dashing hopes of possible output cuts to ease stretched inventories. And BP expects US shale production to keep rising, eventually doubling to 8m barrels per day in the 2030s.
In this climate it’s unsurprising that broker forecasts continue to head to the downside rather than up. Goldman Sachs‘ commodities guru Jeff Currie said last week that oil prices could even dip below the $20 per barrel milestone, extending Morgan Stanley and Citi’s recent bearish predictions of $20 oil in the near future.
Earnings woes to endure?
Shell announced earlier this month that earnings on a current cost of supplies basis slumped a stonking 80% in 2015, to 61 US cents per share thanks to the tanking oil price. And further Brent weakness since the turn of this year suggests that a bottom-line turnaround is still some way off.
Shell has embarked on massive cost-cutting and capex reductions to try to weather the storm, but these measures have clearly been no match for a deteriorating top line. The London business announced it was taking the hatchet to another 10,000 jobs following this month’s disastrous results, with the $53bn takeover of BG Group adding further pressure to the balance sheet.
But with the acquisition first touted when oil was dealing around $60 per barrel and a recovery in crude values appearing some way off, many remain concerned that the deal will present a further millstone around Shell’s neck.
Dividend in peril
Yet one cause for cheer following 2015’s results was Shell’s decision to keep the dividend locked at 188 US cents per share. Although putting paid to the firm’s progressive payout policy, the decision assuaged concerns that a huge reduction was in the offing.
But I believe a decision to reduce the dividend is a mere formality. The impact of cost reductions and asset sales are unlikely to soothe the balance sheet amid crumbling crude values, and the decision by Standard & Poor’s to cut Shell’s credit rating to record lows this month illustrates the growing pressure on the firm’s debt-loaded balance sheet.
I believe much further trouble is in store for Shell looking ahead and expect shares to keep on falling.
