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Why I’d sell Royal Dutch Shell plc and Enquest plc today

Fossil fuel giant Enquest (LSE: ENQ) took off in Thursday trade following the release of full-year numbers. The stock was last 10% higher on the day and moving away from recent 13-month troughs.

The London driller announced that profit before tax and net finance costs clattered to £33.6m during January-June from £149.7m a year earlier, with revenue and other operating income declining to £294.8m from £391.3m year-on-year.

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Enquest has been smacked by lower production from its assets across the globe, forcing group output to slump to an average of 37,015 barrels of oil equivalent per day, versus 42,520 barrels in the corresponding half in 2016. The company said that the slip “[reflected] natural declines from existing producing fields, in which there has been no recent drilling ahead of Kraken coming on-stream.”

The business also affirmed its recently-revised full-year production guidance, and anticipates it “being within plus or minus 10%” of the 37,015 barrels churned out in the six months to June.

In more promising news, Enquest advised that its much-delayed Kraken asset in the North Sea had churned out maiden oil on June 23, and that the first cargo loads are anticipated in the coming days. Stabilised production rates at the field currently stand at 30,000 barrels per day, it said, and the company expects production to plateau during the first half of 2018 at 50,000 barrels.

Losses predicted

Troubles at Kraken caused Enquest’s share value to plummet late last month after it scaled back its production target to current levels, reflecting prolonged commissioning times at the asset. This proved a hefty downgrade from the previous output estimate of between 45,000 and 51,000 barrels per day which was confirmed as recently as May.

The business of dragging crude out of the ground is of course strewn with many pitfalls, as Enquest has already found out.

But this is not the only headache facing the company as the prospect of the current supply glut persisting long into the future casts a further pall over its long-term revenues outlook. Indeed, Enquest also chalked up non-cash tangible oil and gas asset impairments totalling $79.6m in the first half due to a reduction in its oil price assumptions.

The driller has seen earnings plummet for four years on the bounce, and the City is expecting the company to finally tip into the red in 2017 — losses of 1.4p per share are currently being predicted.

Not shelling out

And the very same concerns over the yawning supply/demand balance in the oil market is also encouraging me to give Royal Dutch Shell (LSE: RDSB) short shrift. Whilst demand is ticking steadily higher, growth rates here could well be swamped as producers across The Americas and Asia are stepping up investment in local production.

The Square Mile’s brokers are anticipating a 191% earnings explosion at Shell in 2017, and an extra 15% bounce in 2018. But I remain fearful that these estimates — just like Enquest’s — are in danger of missing to the downside as oil prices could remain depressed for much longer than currently anticipated.

And for Shell, I reckon the very real prospect of downgrades to current earnings forecasts, in the near term and beyond, is not reflected in its forward P/E ratio of 16.9 times.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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