Why Royal Dutch Shell Plc, BHP Billiton plc And Royal Bank of Scotland Group plc Will Remain Basket Cases Long After 2015

Today I am highlighting three big-cap behemoths likely to experience persistent earnings weakness.

Royal Dutch Shell

Like the rest of the oil sector, Royal Dutch Shell (LSE: RDSB) has seen its earnings forecasts painted with red ink by City analysts in recent weeks.

Shell is expected to see earnings drop a meaty 15% in 2015, to 295.3 US cents per share. But while a 10% improvement is anticipated for next year, to 325.5 cents, a slumping oil price suggests otherwise. The Brent benchmark’s nosedive took in a fresh multi-year trough below $50 per barrel this week, the lowest since mid-2009, and a figure of $20 before the year is out is being touted with increasing confidence.

While signs of stagnating global economic growth are not helping Shell’s earnings prospects, the main culprit behind the black gold price decline is the refusal of OPEC to slash output, as well as swathes of US shale production hitting the market.

In the long term, the effect of a depressed oil price is likely to put many producers out of business, in turn improving the market imbalance. But until such measures filter through to the market, Shell could be forced to hive off even more of its assets to de-risk and bolster the balance sheet, a situation which could further undermine the company’s earnings prospects in coming years.

BHP Billiton

Mining giant BHP Billiton (LSE: BLT) (NYSE: BBY.US) has also been subject to severe earnings downgrades in recent weeks, and the business is now expected to punch a colossal 26% earnings drop for the year concluding June 2015 amid lasting price pressures, to 184.9 US cents per share.

Although a bounceback of 4% is pencilled in for 2016, to 191.7 cents, I believe that expectations of any recovery at BHP Billiton remain tentative at best. Iron ore — responsible for half of group earnings — remains close to five years lows below $70 per tonne, while copper slumped to its cheapest since mid-2010 around $6,100 per tonne this week. The red metal accounts for a quarter of total earnings.

Like Shell, BHP Billiton remains at the mercy of economic conditions in commodities hoover China. So news that the HSBC purchasing managers’ index (PMI) for the manufacturing sector dropped back into contraction at 49.6 in December exacerbates concerns over the state of commodities demand during the next year and beyond.

And with the world’s major earth diggers still ramping up production across the globe, I expect poor fundamentals in key markets to worsen in the coming years, a poor omen for BHP Billiton’s bottom line.

Royal Bank of Scotland Group

Although Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is finally expected to have punched its first profit in 2014 since the banking crisis ripped out earnings five years ago, City analysts expect the business to slip back again in the current 12-month period.

The company is expected to report a 13% earnings decline in 2015, to 32.4p per share. And while a tentative 3% rebound is anticipated for next year, there are a number of issues which could undermine any potential recovery.

Many critics believe that Royal Bank of Scotland’s restructuring programme has been excessively aggressive and threatens to put the kibosh on future growth, a particular problem given that revenues continue to struggle at the core. Indeed, total income at the bank slumped 11% quarter-on-quarter during July-September to £4.4bn.

On top of this, Royal Bank of Scotland is also facing the prospect of rising legal bills owing to previous misconduct, particularly related to the mis-selling of PPI and interest rate swaps. And just last week news broke that it could face fines of up to £5bn in the US related to the wrongful sale of mortgage-backed securities in the country, far ahead of the £1.9bn the bank has set aside.

With Royal Bank of Scotland also facing significant restructuring costs this year and beyond, in my opinion the company is a risky bet for those seeking dependable earnings prospects.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.