Why Are Forecasts For BP plc, Royal Dutch Shell Plc And BG Group plc Still Falling?

It’s pretty obvious why forecasts were cut for our big oil suppliers — it’s been the plummeting price of the stuff, which has hovering around $50 a barrel for much of January. The price did pick up a bit, and after briefly exceeding $60 it’s now around the $55 level. But over that time, forecasts have continued to slide.

Although the BP (LSE: BP)(NYSE: BP.US) share price has warmed up since December’s foggy freeze, reaching 440p after a low of 373p, forecasts have been cut back. Just three months ago the City’s brokers were predicting earnings per share (EPS) of 37.8p for the year to December 2015. A week ago that had dropped to 23.5p, and we’ve even had a further cut since then to 22.6p.

Cutting costs

BP has been cutting costs and shelving projects, and when 2014 results were released we heard of a drop in underlying replacement cost profit from $2.8bn to $2.2bn, coupled with a $3.6 billion net charge largely caused by exploration and development impairments due to low oil prices.

Perhaps analysts are pondering Bob Dudley’s opinion that low oil could be with us for two or three years and factoring in further cost-cutting? Maybe, but even lowered predictions point to big rises in EPS for this year and next, with dividends expected to yield almost 6%.

Across the board

Something similar is happening at Royal Dutch Shell (LSE: RDSB)(NYSE: RDS-B.US), where EPS forecasts have been cut in the past week from 133p to 131.2p — and that’s the latest downwards movement in a six-month trend.

The Shell share price hasn’t see the same post-December recovery as BP, but then its price didn’t dip quite so far previously — overall we’re looking at an 8% drop over 12 months to 2,124p.

Shell has also been cutting back in upstream investments, and there’s likely to be some uncertainty ahead of Q1 figures due on 30 April.

At BG Group (LSE: BG) the pattern has been repeating, with the EPS consensus forecast for 2015 down to 27.1p today from 29.5p a month ago — and 55.5p three months ago. That’s clearly the biggest cut of the three, and it’s reflected in the share price which is down 24% over a year to 843p.

But at least the forecast slump has halted, for now at least, with the current forecast up a fraction on last week’s.

Reality check

Overall, it looks like the effects of cheap oil really are likely to go on for longer than originally anticipated — and the City is catching up with reality.

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Alan Oscroft 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.