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44 Reasons Why Royal Dutch Shell plc Is A High-Risk Proposition

In this article I am looking at why Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) looks set to suffer from enduring earnings troubles.

Bottom line continues to crumble

A backcloth of slumping oil prices continues to cast doubts over Royal Dutch Shell’s earnings prospects. The black gold giant announced last month that earnings slumped 44% on a current cost of supplies basis during January-March, to $4.5bn, and I expect worsening industry conditions to seriously undermine Shell’s long-term growth story.

The massive first-quarter drop was in large part attributed to $2.9bn worth of charges, with $2.3bn of this sum resulting to royal dutch shellwrite-downs in the value of its refineries in Asia and Europe. Shell has been forced to take the red pen to its valuation of these assets due to weak refining margins, a situation likely to worsen as floods of new supply hit the market.

In its latest round of price forecasts made at the start of the month, the US Energy Information (EIA) Administration said that it expects West Texas Intermediate (WTI) crude to average $96.59 per barrel in 2014 before crashing to $90.92 next year. The benchmark was recently trading at $103 per barrel.

In particular, the EIA expects surging domestic shale production to create a mammoth supply glut. Production from the United States clocked in at 7.4 million barrels last year, the institution noted, and this is projected to hit 8.5 million this year before marching to 9.2 million in 2015. If realised, next year’s figure would represent the highest annual level since the early 1970s.

Meanwhile, Shell’s company’s ongoing divestment drive also threatens to derail earnings expansion in coming years. Indeed, the business noted that total production slipped 9% during the first quarter to 3.25 million barrels of oil equivalent per day as a result of a significantly-reduced asset base.

And Shell announced in April that it is in the process of shedding additional downstream assets in four countries. The firm already raised $2.6bn through the sale of the majority of its projects in Australia in February.

In my opinion a combination of deteriorating margins, rising exploration and development expenses and the effect of ongoing streamlining measures threatens to crimp Shell’s earnings performance well into the future.

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> Royston does not own shares in Royal Dutch Shell.