The fossil fuel giant has seen its share price explode 30% in the past two months, moving in lockstep with the Brent benchmark’s surge back above the $40 per barrel milestone.

But with data surrounding the oil sector still worsening, I see little reason for crude’s recent march higher, leaving Shell’s share price in danger of a massive reversal.

Supplies surging

Stockpile data from the US disappointed yet again this week, a 9.4m barrel build in the latest period exceeding forecasts and taking total levels to a fresh record of 532.5m barrels.

The world is still desperately awaiting a co-ordinated production cut from OPEC, Russia and the US. But the pumpers can’t even agree to an output freeze, let alone a much-needed reduction to ease the pressure on bloated inventories.

And with China’s economy locked in a hair-raising tailspin, there’s clearly little prospect of this excess material evaporating any time soon.

Fragile forecasts

The City expects this backcloth to keep earnings under pressure at Shell, not surprisingly. A 34% decline is currently pencilled-in for 2016, leaving the company trading on an extremely-high P/E rating of 22.8 times.

Still, the number crunchers expect the oil leviathan to rebound with a 79% bottom-line bounce next year, driving the earnings multiple to just 12.8 times.

While this is a very decent value on paper, I believe stock pickers should resist the temptation of piling into the business. Until supply/demand indicators start to pick up, I believe predictions of a near-term bounceback at Shell are built on sand foundations.

Long-term worries

Indeed, I reckon there’s a real danger that Shell will end up becoming a mere shadow of its former self, and fail to deliver the stonking returns of previous times.

Firstly the company continues to hive off assets at a hair-raising rate. Shell announced in March it was raising its 2016 divestment target to $30bn in a desperate bid to mend its battered balance sheet, up $10bn from its previous goal made a few months earlier.

On top of this, Shell is still rapidly scaling back its capex budgets, a strategy that has seen major projects from drilling in Alaska to development of the Carmon Creek oil sands asset in Canada fall by the wayside.

Many will point to Shell’s acquisition of BG Group as a potential growth driver moving forwards. But the chronic oversupply washing over the liquified natural gas (or LNG) market is expected to remain well into the next decade at least, casting doubts over the economic viability of the tie-up. Indeed, Woodside Petroleum put plans to develop its Browse LNG project in Australia on ice just this week.

And with global lawmakers increasingly shunning fossil fuels in favour of clean energy like solar and wind, Shell is in severe peril of being left out in the cold.

The post Is It Finally Time To Give Up On Royal Dutch Shell Plc? appeared first on The Motley Fool UK.

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

The post If You Own BG Group plc, Should You Sell Royal Dutch Shell plc? appeared first on The Motley Fool UK.

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Owain Bennallack owns shares in BG and Shell. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

If you hold a more bearish view, you might say that Shell has splashed too much cash on a set of resources that won’t make any money unless the price of oil doubles.

As a Shell shareholder, I have a keen interest in this deal. In this article I’ll explain why I believe it probably will succeed, and could provide a great buying opportunity.

Is Shell cheap?

This week’s final results from Shell showed a dramatic 87% drop in full-year profits, which fell from $14.9bn to $1.9bn. However, Shell’s underlying earnings were broadly in line with expectations, at $1.69 per share. Much of this year’s fall in profits was the result of $8bn of non-cash writedowns on the value of the firm’s oil and gas reserves.

However, Shell’s cash flow was more reassuring. I estimate that Shell generated $5,661m of free cash flow in 2015 after tax and interest payments. That’s only a 59% fall from the 2014 figure of $13,907m — a much smaller drop than the 87% decline in reported profits.

Shell has also committed to maintaining its $1.88 per share dividend for another year, giving a yield of 8.6%. Although yields this high are often risky, Shell’s net gearing is only 14%. The firm can afford to use debt to subsidise the dividend for a short period if required.

How will BG fit in?

Shell boss Ben van Beurden had to push quite hard to persuade shareholders to approve the BG offer. Because of this, we already know that Shell believes it can achieve pre-tax savings of at least $2.5bn per annum from 2018. We also know that Shell expects to sell $30bn of assets between 2016 and 2018, as it restructures both companies’ portfolios.

Shell also hopes to spend $25bn on share buybacks between 2017 and 2020, which would have the effect of buying back the majority of the new shares issued to buy BG. However, market conditions could make this hard to afford. How dilutive is the BG deal without a buyback?

BG’s underlying earnings per share for 2015 were $0.49. This is equivalent to 29% of Shell’s underlying earnings for 2015, which were $1.76.

The new shares being issued by Shell will only increase its share count by 23%. As this is less than the contribution made by BG’s earnings, I estimate that buying BG won’t dilute Shell’s earnings per share, which is good news.

Indeed, I’m fairly confident that in three-to-five years, the Shell-BG deal will look like a smart move and will be delivering results for shareholders.

Near-term profit potential?

Personally, I expect the price of oil to start to recover in the next 12 months. If I’m right, then Shell’s share price could rise sharply when this happens, as analysts recalibrate their earnings forecasts.

At today’s price of £15 per share, I think Shell shares represent a good long-term income buy, with the added potential for capital gains.

The post Is This The Chance Of A Lifetime To Buy Royal Dutch Shell Plc? appeared first on The Motley Fool UK.

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Still, things are recovering cautiously, and with about half a day of January still to go the top index is back up to 5,980 points. And when markets are depressed, that means bargains, right?

Pharma recovery

Look at AstraZeneca (LSE: AZN), whose shares have lost 9% over the past 12 months, to 4,382p. How does the price of oil and Chinese economic woes affect AstraZeneca’s long-term pharmaceuticals business? Not at all!

AstraZeneca has been in the process of focusing on its core businesses and beefing up its drugs development pipeline ever since new boss Pascal Soriot took the helm in October 2012, and we’re not expecting a return to earnings growth until 2017 at the earliest. On 4 February, we should have full-year results, providing the latest news on the firm’s rejuvenation strategy.

Things looked very stable at third-quarter time, and we’ve also seen quite a number of promising milestones in drug development along the way — Q3 R&D costs were up 18%, “reflecting the recent start of key Oncology trials“.

Meanwhile, AstraZeneca is still nicely profitable, on a P/E of 15.5 and offering a likely 4.2% dividend yield.

Takeover boost

We should have full-year results from BG Group (LSE: BG) on 5 February, but they’ll take a back seat to the ongoing takeover from Royal Dutch Shell. Originally revealed back in April 2015 before the oil price slide had really set in, the plan was put to the vote this week and both sets of shareholders have voiced their approval — Shell on Wednesday and BG on Thursday.

BG’s share price fell back from its initial boost as falling oil raised fears that Shell was overpaying and that the merger would be called off or the terms changed, but we’ve seen a 16% recovery to 1,040p, which is largely in line with the Shell offer.

Mergers and acquisitions were always a big possibility after the oil price set asset values tumbling, and in this case I think BG shareholders are enjoying the better deal.

Engineering boost

Rolls-Royce Holdings (LSE: RR) has been through tough times, with its shares losing half their value since last April’s peak, to 540p. The cause was a series of profit warnings due to very tough trading conditions, and the company is firmly in turnaround mode right now.

Full-year results are due on 12 February, after a third-quarter update warned that “Further market headwinds increase uncertainty for 2016“. At the time, outlook for the full year was adjusted to the lower end of previous guidance, though I think that might still turn out to be optimistic.

If results are better than expected, we could see an uptick in the share price, but with EPS already forecast to drop by 43% in 2016 to put the shares on a forward P/E of 18, I wouldn’t be buying now.

The post 3 Hot Picks For February: AstraZeneca plc, BG Group plc, Rolls-Royce Holding PLC? appeared first on The Motley Fool UK.

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I’m now having second thoughts about this, partly as a result of last week’s news, which saw Standard Life announce that it will vote against the merger at the upcoming meeting.

This announcement has prompted me to stop for a moment and ask if the transaction still makes sense.  

The problem?

There’s a strong argument to suggest that, for those companies that invest right the way throughout an economic cycle, average profits will be higher over the longer term when compared with those of companies that are more reluctant to invest.

This may be a sound argument, but in my view it shouldn’t be used as an excuse to indulge masochistic tendencies.

The offer price for BG shareholders already included a notable premium. However, with oil prices falling like they have since April ($67) and the offer price having remained fixed, this premium has been rising steadily for some time.

With little sign of a rebound from crude on the horizon, the transaction is beginning to look like an ‘impairment charge waiting to happen’.

More to the point, for it to benefit shareholders in the way that management says it will, Shell will need every dollar of its oil price assumptions to prove correct. The break-even assumptions included in the offer were: $67/bbl in 2016, $75/bbl in 2017 and $90/bbl in 2018-20.

The cash flow break-even is $50 per barrel.

More oil price woes

These forecasts may have remained an open question if it weren’t for the fact that western powers have now begun to lift sanctions against Iran’s oil industry, so a further increase in global supply could be imminent.

In the pre-sanctions world, Iran’s output was close to 3.5m barrels per day, equivalent to just over 3% of current global production.

Regardless of how long it takes to get back to that level, any notable increase in global supply will only delay the time at which prices either stabilise or begin to recover.

The net effect is that Shell’s price assumptions are probably out of the window now, if they weren’t already.

The takeaway

Stranger things have happened but the prospects of the deal being voted down by enough shareholders appear to be slim.

Standard Life seems to be alone in opposition to the transaction, while an army of corporate advisers continue to egg on both sets of management and shareholders.

However, private investors should consider this.

Dividend cuts have rippled throughout the commodities space like a wave of falling dominoes of late. This is while Shell paid out more in debt interest during the first nine months of the current year than it actually earned itself during the period.

When the game is finally up on Shell’s oil price fantasies, its profitability is squeezed further and management is forced to kneel before investors with a record impairment charge in hand, how much longer do you think the dividends will last?

How long do you think it will be before management is forced to tear up the pledge of a $25bn capital return ahead of 2018?

It may never happen, but I believe events of the last quarter have made it a threat that warrants consideration.

The post Royal Dutch Shell Plc and BG Group Plc: To Be Or Not To Be? appeared first on The Motley Fool UK.

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

Glut of black gold

Geopolitical troubles could easily trigger an oil shock that could send the price spiralling upwards as fast as it has fallen. Yet markets can’t bring themselves to think about that prospect with the world swimming in an absolute glut of the black stuff.

When the oil price falls, even vertically-integrated oil majors like Royal Dutch Shell (LSE: RDSB) fall with it. Shell is down 30% in the last year and 4% so far in 2016. Smaller explorers such as Premier Oil (LSE: PMO) have it even harder. Its share price is down 76% over 12 months, and a shocking 24% in the last week. Both are having a tough time, and times may get tougher.

BG or not BG?

Management at Shell has the further issue of integrating recent acquisition BG Group in a deal that has many critics. Ian McVeigh at fund manager Jupiter has likened it to Royal Bank of Scotland’s disastrous takeover of ABN Amro just before the financial crisis. This week institutional investor Capital Group, which also holds a sizeable Shell stake, has more-than-halved its holding in BG from 2.2% to 0.9% in protest.

Shell now yields an astonishing 8.22% but it’s hard to see how this can be sustained for much longer with the oil price sinking and profits plunging. We’ve seen too many dividends fall over the last year to be shocked by the notion that Shell will have to cut as well, despite its cherished record of never having done so since the war.

Premier plunge

Premier is likely to post a £110m pre-tax loss for last year, although optimistic forecasts suggest this should convert into a £38m profit in 2016. But investors are right to be running scared right now, as Premier’s forecast debt total of $2.7bn is based on the fantasy price of oil at $58 a barrel. While Premier can survive 2016, its share price will suffer at the hands of plunging sentiment.

Worryingly, the oil price could drop further as Iran is likely to pump with abandon once sanctions are lifted. Iran’s economy is more diversified than Saudi’s, which draws 80% of its revenues from petrol, and it calculates that its pain threshold is far higher. Saudi seems to be making the same calculation: one of them will be wrong. If tensions rose even higher and Iran threatened oil supplies through the Straits of Hormuz, the sky would be the limit for the oil price.

Also, plunging oil investment will eventually hit supply. Oslo-based consultancy Rystad Energy forecasts that worldwide oil and gas investments will slide to a six-year low of $522bn this year, following their 22% fall to $595bn last year. At some point, oil has to recover. But even that may not be enough to save Shell and Premier. US shale is the new swing producer, that could limit future price rises to $50 or $60.

2016 will be a tough year for Shell and Premier, and the longer-term outlook is troubling too.

The post Can Royal Dutch Shell Plc And Premier Oil PLC Withstand Another Year Of Cheap Oil? appeared first on The Motley Fool UK.

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For me this represents a huge buying opportunity that shouldn’t be missed. Shell has a whopping dividend yield of over 8% and a PE ratio of 7.7. The market believes that a dividend cut is inevitable but I’m not so sure. The dividend record of Shell is impeccable and this isn’t the first oil price decline the company has been through. The dividend cover is solid due to the flying profits of the downstream division. This is because integrated oil companies have huge downstream divisions that offset losses from the upstream division when the oil price falls. 

Cost controls

In response to the decline in the oil price Shell has reduced costs and capital investments to make the company “more focused and competitive”. And there have been divestments across the globe to make Shell a more streamlined company before the BG deal. 

Many believe that the BG Group (LSE: BG) will push the company forward and ensure its future. It has now passed regulatory approval in Europe, Brazil, Australia, the US, and as of yesterday in China. This merger will ensure the dividend for years to come due to BG’s ultra low cost developments in Brazil and Australia. I also believe that Shell will do anything to ensure the deal goes through. CEO Ben Van Burden has said that he will do everything he can to ensure the takeover goes smoothly and there have also been staff cuts in the thousands to get the company ready for the deal. Only yesterday the company announced it was cutting around 3% (2,800) of the enlarged workforce. It has also said there will be over $3bn worth of cost synergies after the deal and this should aid Shell’s bottom line hugely. 

BG share opportunity

RBC said yesterday that the preferred play here is to buy BG shares as a way to get Shell shares at a discount. Even though the deal has now passed all regulatory approvals there is still merger arbitrage to be played. Currently the offer premium stands at around 13%, this means that the BG share price is trading around 13% lower than the offer is worth in terms of the cash and Shell shares that will be received. For anyone looking to increase a holding or open a position in Shell, it’s a very attractive opportunity and one that deserves to be looked at in detail. 

Obviously there can be no assurances that the deal goes through. However, the rhetoric from Shell indicates it will happen at all costs. I believe that the enlarged group will be a fantastic investment in years to come in terms of capital growth and income. 

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Jack Dingwall has shares in Royal Dutch Shell. 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.

Call to reject the offer

It emerged this weekend that Ian McVeigh, head of governance at Jupiter Fund Management and one of the City’s biggest fund managers, has compared the proposed takeover of BG by Shell to the disastrous purchase of ABN Amro by Royal Bank of Scotland in 2007. RBS’s ill-fated takeover of ABN Amro ultimately resulted in the government bailout of RBS and years of pain for the bank. 

Nevertheless, Shell’s management seems to be dead set on going ahead with its $70bn offer for BG. Shell’s chief executive has told investors that the deal would only fall through if “if people stopped using energy”.

Reassuring

To reassure investors that the deal does indeed make sense, Shell has hiked the dollar value of savings it expects to generate by combining with BG. An additional $1bn in savings will come from cost cutting in back office functions, marketing and shipping, which had already been expected to save $1bn a year. Further, the enlarged group will be able to save $1.5bn per annum from a cut in exploration activities, as the combined group spends less on searching for new oil fields. 

Shell’s management had initially predicted up to $4bn in “value synergies” from the merger. Under City takeover rules, Shell can only set out initial operations cost reductions that will be achieved by eliminating clear duplication in the accounts, which accountants can independently verify — duplications such as separate office buildings located next door to each other. The projected “value synergies” include benefits that can’t yet be calculated. 

These cost savings and synergies should ensure that the deal works with oil trading at $60 per barrel, which is the crunch point for much of the industry.

That said, the deal will only really work if Shell’s divestment plan to shift $30bn of non-core assets from the enlarged group goes to plan. These asset sales will allow Shell to pay off the debt resulting from the deal and help sharpen up the group’s portfolio. 

Buy, sell or hold?

There’s no denying that the Shell-BG merger is fraught with risks, especially when you consider that the oil industry is facing an unprecedented period of pain. 

Still, Shell has built a reputation for excellent project management over the years, and now more than ever, the company needs to show that it can execute. So, in many ways, the success or failure of the merger depends on Shell’s ability to execute. Unlike RBS, Shell has a history of being able to integrate new businesses successfully. 

So overall, it all comes down to BG and Shell’s management teams and the way they decide to go about integrating the two companies. 

The post Is Royal Dutch Shell Plc Making A Big Mistake By Acquiring BG Group plc? appeared first on The Motley Fool UK.

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Despite total penalties coming in higher than even the most conservative estimate, many shareholders will probably have felt a sense of relief when it was announced this year that BP (LSE: BP) had come to a settlement with US courts over penalties under the Clean Water Act.

These now total $18 billion, with $11 billion charged to the income statement in the first half of 2015, in addition to a further $2.8 billion in business economic loss claims.

However, what there has been very little coverage of in the financial media is that BP still faces a number of lawsuits in relation to the Macondo spill, the most unsettling of which is a class action lawsuit being brought by the holders of BP’s ADR shares.

This could pose a significant threat to the group’s ability to move on from the 2010 incident and, in all probability, it could also be a source of further downside pressure for the shares during the coming quarters.

Furthermore, the earnings outlook for BP remains bleak, most notably because of uncertainties surrounding future oil prices. In 2014, earnings fell considerably even while the average price at which BP sold oil remained close to $90.

In H1 2015, the fall in Brent crude prompted the average realised price for BP’s oil to fall to $51, in turn driving underlying EPS down by a further 42% to $0.21.

If the price of oil falls further from the current $48 level in the coming months, which it could do, then shareholders could be in for more pain.  

In addition, BP consensus estimates suggest that BP will barely cover its dividend in this year and the next, which means that shareholders will be exposed to the risk of disappointment if the group gets hit with more legal costs or if oil prices take another dive southwards.

This all adds up to too much risk for me and when I consider that, even at 2010 lows, the shares still trade on 14x forward EPS; it becomes a No from me. I’m out.

Shell could be a good long-term play — but the next few years may be disappointing…

Looking at the offer announcement from Shell (LSE: RDSB) in relation to its purchase of BG Group (LSE: BG), it would seem that there is a reasonable amount for shareholders in both companies to be happy about.

This is because, in addition to creating one of the world’s largest oil and gas businesses, the combined group could benefit from an additional $5 billion in annual free cash flow and $2.5 billion in cost savings. Shell management tell us that this will result in a notable boost to earnings from 2018 onwards.

My thoughts on this are that maybe management is right and that, over the long term, maybe this tie-up will be very positive for shareholders in the combined group. After all, they have already made some very alluring promises in relation to dividends and buybacks ($25 billion from 2018).

However, if I were a shareholder in BG, I’d probably be selling up and walking away. The reason being that most of Royal Dutch Shell’s projections assume oil prices which, at best, seem slightly optimistic. Particularly if we consider recent suggestions that Brent could fall as low as $20 per barrel.

The assumed prices in question are $67/bbl in 2016, $75/bbl in 2017 and $90/bbl in 2018-20.

These estimates make a lot of Shell management’s promises, particularly on earnings and dividends, seem like a tall order! 

I’m sorry guys but, once again, it’s going to be a ‘no’ from me. I’m out.

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However, it seems the market believe that the deal will fall apart. Indeed, the current spread between BG’s current share price and Shell’s offer has grown to around 16%. 

Merger arbitrage

Shell is offering 383p in cash plus 0.4544 Shell B shares for every BG share. At time of writing this works out at around 1,128p, although BG’s shares are only trading at 991p, a full 13.3% below the offer price.

Profiting from a deal like this is called merger arbitrage and is big business. Nonetheless, in most cases the spread between the offer and share price of the target is so small that you’d need to be a specialist to make any profit.

With a 13.3% return possible on the Shell-BG merger, this opportunity is one-of-a-kind. What’s more, as the merger is set to complete during the first quarter of next year, BG shareholders are set to receive an additional 27p per share via dividends before the deal is finalized. 

Including dividend cash, the total possible profit is just under 17%. 

Long-term investing 

Merger arbitrage and trading isn’t usually the Foolish way but by buying into the BG-Shell deal, not only do investors stand to profit from the merger, they’ll also end up with Shell shares, which are a great addition to any portfolio. 

At present levels, Shell supports a dividend yield of 7.5%, the highest yield in the FTSE 100. And for the time being, the company’s dividend payout is here to stay. 

Dividend guarantee 

Shell’s CEO Ben van Beurden gave a speech earlier this week at the Barclays investment conference, and he stated that Shell’s main priority is to maintain its dividend payout at present levels. 

He also went on to say that the BG-Shell merger is going ahead no matter what and the deal will help strengthen Shell’s balance sheet. 

Moreover, Ben van Beurden told analysts that Shell is planning for what could be a prolonged downturn of the oil price. This planning includes cuts to capital spend while maintaining a sensible and affordable investment programme, cuts to operating costs and asset sales.

With regards to new investments, Shell is implementing a rigorous appraisal process and one that allows only the very best projects to go ahead as long as they are affordable according to the prevailing environment. In addition, cost savings across existing operations have already helped the company reduce per-barrel operating costs by $10 across the group. 

The bottom line

Using merger arbitrage to profit from the BG-Shell deal could yield a quick 17%. Also, long-term investors will benefit with the allocation of Shell shares received as part of the deal. 

The post Should You Buy BG Group plc And Royal Dutch Shell Plc For A Quick 17% Profit? appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares of Royal Dutch Shell B. 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.