3 Reasons Why Royal Dutch Shell plc Could Be Set To Tank

royal dutch shell

Today I have picked out a handful of reasons why Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) could be ready to dive lower.

Growth potential taking a hit

Shell shook the market last month when it followed up its first profit warning for a decade with catastrophic full-year results for 2013. On a constant cost of supplies (CCS) basis, the oil giant saw earnings slump to $16.7bn from $27.2bn in the previous year, with rising exploration costs, weak refining conditions and lasting operational problems in Nigeria all playing a part.

The results prompted new chief executive Ben van Beurden to announce an acceleration in asset disposals across the group, following on from the sale of some of its Brazilian offshore assets and Australian gas projects in January.

Meanwhile, the company is also attempting to rein in spiralling capital expenditure — net capital investment rose almost 50% last year to $44.3bn — and which includes the suspension of its Arctic drilling plans in Alaska. Such measures threaten to derail the firm’s long-term earnings prospects.

Oil price outlook remains murky

Of course, Royal Dutch Shell remains at the mercy of further heavy weakness in the oil price, the effect of Brent prices falling to $107 per barrel currently from $120 at the start of 2013 weighing heavily on the firm’s profits over the past 12 months.

Indeed, Bank of  America-Merrill Lynch says that it holds a “moderately negative stance on global oil for 2014 as the market moves from being relatively balanced to slightly oversupplied,” with surging US output and subdued demand growth likely to weigh on prices. The firm expects Brent to average $105 this year, and could possibly dip as low as $90 during the period.

And the broker believes that other factors could also weigh on prices well into the future. “With demand growth in emerging markets including China decelerating and a strong US dollar outlook ahead, we see negative implications to global oil prices in the longer term,” the bank notes.

Questions loom over long-term dividends

Although Shell is a popular selection for income investors, January’s results have cast doubts over whether the firm can keep annual dividends rolling at attractive rates, not to mention its gargantuan share buyback scheme.

Shell is anticipated to punch annual dividend growth of 3.5% in 2014 and 2.6% in 2015, slowing markedly from the 4.7% rise seen last year. Although payments for these years still provide chunky yields of 5.1% and 5.2% respectively, a backdrop of escalating costs and falling revenues — not to mention effect of asset reduction on its long-term earnings outlook — could stymie growth for the considerable future.

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> Royston does not own shares in Royal Dutch Shell.