To suggest the game is up at Shell (LSE: RDSB) could be considered ludicrous given the investor stampede of recent weeks.
The fossil fuel giant has seen its share price explode 30% in the past two months, moving in lockstep with the Brent benchmark’s surge back above the $40 per barrel milestone.
But with data surrounding the oil sector still worsening, I see little reason for crude’s recent march higher, leaving Shell’s share price in danger of a massive reversal.
Supplies surging
Stockpile data from the US disappointed yet again this week, a 9.4m barrel build in the latest period exceeding forecasts and taking total levels to a fresh record of 532.5m barrels.
The world is still desperately awaiting a co-ordinated production cut from OPEC, Russia and the US. But the pumpers can’t even agree to an output freeze, let alone a much-needed reduction to ease the pressure on bloated inventories.
And with China’s economy locked in a hair-raising tailspin, there’s clearly little prospect of this excess material evaporating any time soon.
Fragile forecasts
The City expects this backcloth to keep earnings under pressure at Shell, not surprisingly. A 34% decline is currently pencilled-in for 2016, leaving the company trading on an extremely-high P/E rating of 22.8 times.
Still, the number crunchers expect the oil leviathan to rebound with a 79% bottom-line bounce next year, driving the earnings multiple to just 12.8 times.
While this is a very decent value on paper, I believe stock pickers should resist the temptation of piling into the business. Until supply/demand indicators start to pick up, I believe predictions of a near-term bounceback at Shell are built on sand foundations.
Long-term worries
Indeed, I reckon there’s a real danger that Shell will end up becoming a mere shadow of its former self, and fail to deliver the stonking returns of previous times.
Firstly the company continues to hive off assets at a hair-raising rate. Shell announced in March it was raising its 2016 divestment target to $30bn in a desperate bid to mend its battered balance sheet, up $10bn from its previous goal made a few months earlier.
On top of this, Shell is still rapidly scaling back its capex budgets, a strategy that has seen major projects from drilling in Alaska to development of the Carmon Creek oil sands asset in Canada fall by the wayside.
Many will point to Shell’s acquisition of BG Group as a potential growth driver moving forwards. But the chronic oversupply washing over the liquified natural gas (or LNG) market is expected to remain well into the next decade at least, casting doubts over the economic viability of the tie-up. Indeed, Woodside Petroleum put plans to develop its Browse LNG project in Australia on ice just this week.
And with global lawmakers increasingly shunning fossil fuels in favour of clean energy like solar and wind, Shell is in severe peril of being left out in the cold.