It has seen its stock value dive 57% since reports of the SFO probe emerged just under a month ago. The stock is now dealing at levels not seen since January 2009, and I reckon contrarian investors are right to sit on their hands right now as newsflow steadily worsens.

SFO strain

The SFO advised on May 12 that it was investigating Petrofac “for suspected bribery, corruption and money laundering” as part of its probe into Monaco-based Unaoil. Petrofac engaged Unaoil to provide local consultancy services, chiefly in Kazakhstan, between 2002 and 2009.

And the bad news has kept on coming since. Less than a fortnight later Petrofac said COO Marwan Chedid — who had been interviewed by the SFO along with chief executive Ayman Asfari — had been suspended, although it was quick to point out that “these actions do not in any way seek to pre-judge the outcome of the SFO’s investigation.”

As if this wasn’t alarm enough, Petrofac added that the SFO had rejected the findings of an independent investigation it had launched into Unaoil last year. And to cap off a hat-trick of woe, Petrofac advised that the SFO “does not consider the company to have cooperated with it, as that term is used in relevant SFO and sentencing guidelines.”

Cheap but risky

Some may argue that Petrofac’s high risk profile is baked in at current prices. For 2017, City predictions of a 16% earnings uplift leave the oilfield services giant dealing on a P/E ratio of 4.2 times, some way below the widely-regarded bargain benchmark of 10 times.

However, the size of any potential penalties that could be imposed should any wrongdoing be ascertained are impossible to quantify right now, particularly as the SFO investigation is tipped by many to rumble on for at least the next few years. And of course the impact of an adverse result on the firm’s reputation could seriously hamper Petrofac’s ability to win business looking ahead.

Aside from these more immediate legal issues, the uncertain state of the oil market adds an extra layer of risk to Petrofac’s outlook, troubles which are expected to persist for some time. Indeed, the Square Mile expects a backdrop of sustained capex budget pressure across the oil industry to push earnings into reverse again next year (a 16% decline is currently anticipated at Petrofac).

Don’t shell out

This patchy industry outlook is also encouraging me to keep steering clear of Royal Dutch Shell (LSE: RDSB).

Brent values have dipped back below $50 per barrel in recent sessions, and I believe prices have much further to fall as shale producers get back to work. Latest Baker Hughes data showed the US rig count up for a 20th consecutive week, to a total of 733 units, up 11 week-on-week.

While the City expects earnings to bounce 195% higher in 2017, this is dependent on crude values snapping out of their recent decline, a hard ask as insipid demand keeps inventories locked around record levels and output hikes in the States overshadow the impact of OPEC production freezes.

The prospect of a prolonged supply/demand imbalance has seen brokers downgrade their earnings forecasts and I reckon further downgrades could be around the corner, particularly given the driller’s slightly-toppy forward P/E ratio of 16.1 times.

The post Royal Dutch Shell plc vs Petrofac plc: which oilie should you buy right now? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. 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.

The City expects Shell to fork out dividends of 188 US cents per share through to the close of next year, meaning the crude colossus sports a yield of 7.2%. This clearly blows the FTSE 100 forward average of 3.5% to smithereens.

But not even this headline-grabbing figure would be enough to encourage me to part with my cash.

Shale shines

Escalating fears over the crude market’s supply/demand imbalance are reflected by Shell’s share price sinking to its cheapest since late November just this week.

Investor appetite has seeped back through the floor as the reality of OPEC’s production agreement of autumn has become clear. While the cartel’s compliance rate has exceeded all expectations (the group’s compliance rate rose to 104% in March from 90% the previous month), more concerning is the resulting support for oil prices that has seen US shale producers return to work with gusto.

Baker Hughes data last week showed 683 drilling units in operation in American oilfields, representing the highest level for two years. This is putting huge strain on already-bloated crude inventories, and threatens to keep oil prices locked around or below the $50 per barrel marker as it has been for many months.

Even should OPEC extend its supply freeze beyond the initial six-month period due to expire in June, these steps would simply encourage North American producers to keep upping tools, thus putting the kibosh on any oil price breakout.

In danger?

A surge in crude values is essential for Shell to realise forecasts of earnings rises of 202% and 27% in 2017 and 2018 respectively.

Although the business continues to divest assets and reduce capex budgets to mend its pressured balance sheet, such measures can only be extended so far before they become seriously earnings-destructive in the long run.

Shell may have the necessary capital strength to shrug off poor dividend coverage to meet current dividend projections with anticipated earnings of 139.7 cents per share actually outstripping this year’s expected payout, while coverage stands at 1.2 times for 2018. But I believe the company’s generous dividend policy could come crashing down further out.

In a spin

Berendsen (LSE: BRSN) is another income stock expected to pay out big in the medium term, but which I am also giving short shrift to.

The laundry giant is anticipated to pay a 33.9p per share dividend in 2017, yielding 4.4%, and to lift the reward to 35.3p next year, yielding 4.5%.

But extreme trading difficulties are putting these projections under the microscope — Berendsen warned last month that the “first half of 2017 will continue to be impacted by legacy operations in the UK.”

Dividend coverage stands at 1.7 times through to the close of 2018, below the widely-regarded security benchmark of two times. And with net debt ballooning to £429.4m last year from £370.9m a year earlier, and Berendsen facing a lot of hard work and capital expenditure to remedy the chronic underinvestment of yesteryear, I reckon current dividend targets could fall well short.

The post Royal Dutch Shell plc isn’t the only dividend champion I refuse to buy appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Berendsen and 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.

RBS reported a ninth successive annual loss for 2016 last month, the bank’s pre-tax loss swelling to £7bn from £2bn a year earlier. As well as being crimped by £5.9bn worth of misconduct charges, the business was also smacked by £2.1bn of restructuring costs.

The financial colossus advised that “RBS currently expects that 2017 will be its final year of substantive legacy clean-up with significant one-off costs,” adding that “we anticipate that the bank will be profitable in 2018.”

But even the most patient of investors must now be bored of ‘jam tomorrow’. As well as facing a further build in PPI-related costs ahead of a 2019 claims deadline, other litigation issues may also rear their head later down the line. And of course RBS’s costly transformation drive has much further to run.

Besides this, it also faces a poor revenues outlook thanks to a combination of over-aggressive asset shedding and expectations of economic cooling in Britain in the medium term. I believe the bank still carries too much uncertainty for savvy investors.

Don’t toil with oil

The strong prospect of oil prices never returning to their previous glories makes me less-than-enthused by the investment outlook for BP (LSE: BP) too.

In the near term there are plenty of reasons for investors to remain sceptical over a recovery in black gold values. Baker Hughes rig count data from the US today is expected to show a seventh straight weekly rise, the steady build in operating units forcing analysts to upgrade their forecasts for US production in 2017 and beyond.

The main takeaway from OPEC’s output freeze agreement in November, along with its success in roping-in non-cartel-members like Russia, is encouraging many other crude-producing nations to ratchet up production and ride the mild recovery in oil prices, keeping the market’s supply/demand balance in business.

So any charge beyond the current $50 per barrel Brent range remains a pipe dream at present, particularly as the current OPEC deal — slated to last until summer — is in danger of unravelling. Indeed, Saudi Arabia’s willingness to keep producing under its own target is being increasingly tested as other group members like Iran pump above their allowed quotas.

Looking at the longer term, the determination by governments across the world to move towards greener sources remains undimmed despite the pro-oil and gas policies of President Trump.

And the falling costs of such sources threaten to put earnings at BP under the cosh much sooner. Indeed, a report co-authored by the Grantham Institute at Imperial College London and the Carbon Tracker Initiative last month indicated that surging global demand for electric cars and solar panels could see oil and gas demand growth screech to a halt by 2020.

I reckon the prospect of BP’s top line coming under increasing pressure in the years ahead makes it an extremely-unappealing pick for near- and long-term investors alike.

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Indeed, the energy giant is now dealing 8% lower to those three-year peaks. But I believe the company’s share price should still be dealing much, much lower.

The City expects earnings at Shell to explode 93% in 2017, resulting in a P/E ratio of 15.2 times. But I reckon expectations of such an electrifying rise remain on very shaky ground, given that a healthy uptick in barrel values is needed to make these forecasts a reality.

I believe a forward P/E ratio of 10 times, anchored on the watermark reflective of stocks with high risk profiles, is a fairer reflection of Shell’s bottom-line prospects.

And a subsequent share price re-rating would leave the crude colossus dealing at £14.37 per share, representing a stunning 33% discount to current levels

Supply Swells

Investor sentiment has been influenced by a relentless rise in the US rig count since late last year, with recent Baker Hughes numbers showing the number of units hitting fresh 16-month peaks last week, at 597.

But exploding output in the States is not the only barrier to Shell’s earnings recovery as production levels leap elsewhere.

In Brazil, for instance, state-owned producer Petrobras pulled a record 2.3m barrels of the black stuff out of the ground on average in December, taking out the previous record of three months earlier. Although production stepped back last month due to scheduled maintenance, average pre-salt production hit an all-time peak of 1.34m barrels per day.

Investment in Canada’s fossil fuel industry is also driving output here to the stars. Indeed, latest export numbers from the National Energy Board showed crude exports averaged 538,089 cubic metres per day in November, surging from 485,863 metres in the prior month.

Data from Baker Hughes last week also showed that 194 oil rigs were churning material out of the ground last week, almost double the number of units seen a year ago and suggesting that production levels should keep on climbing.

Risky Business

Oil prices received a fillip on Tuesday after OPEC Secretary General Mohammed Barkindo said the group is aiming to keep the compliance rate on an upward bent. The cartel saw conformity with autumn’s agreed production quota hit an impressive 90% last month.

But whether or not the group can keep the rate rising in the months ahead, the viability of November’s deal lasting beyond the summer deadline will be hotly contested by many members seeking to ramp up their own production.

A failure to extend the accord could prove catastrophic for oil prices as rising production elsewhere already threatens to keep global crude inventories at bursting point. US stockpiles struck a fresh record of 518m barrels last week, and are broadly expected to hit new highs when the EIA reports again this week.

Clearly claims of a balanced oil market remain very much in the air, and with it a meaty earnings bounce at the likes of Shell. Given the murky supply and demand indicators still washing over the energy sector, I believe investment in the oil major is still extremely risky at present, and particularly at current share prices.

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According to drill checkers Baker Hughes, the number of oil rigs up and running in the States rose by 29 during the seven days to January 20, taking the total to 551.

This was the largest one-week jump since April 2013 and means that the rig count has risen during 10 of the last 11 weeks. Meanwhile, the number of US rigs in operation now stands at a 14-month peak.

Flowing forth

Producers across the Atlantic are looking to cash-in on the bouncy Brent price in the wake of OPEC’s agreement, the benchmark surpassing the $50 per barrel marker once again. But prices have failed to march on since then as US producers have plugged their devices back into the ground.

News of bubbly supply across the Atlantic takes some of the sheen off hopes that the market will balance later in 2017. Indeed, latest stockpile data showed a further 2.8m barrel build in the States during the week to January 20, according to the EIA.

And recent industry estimates suggest that supply from oil wells should continue to swell higher. The US Energy Information Administration (EIA) for one said earlier this month that it expects crude production from the country to rise by 300,000 barrels per day in 2018, to 9.3m barrels per day.

Sure, this figure is outstripped by expected US demand growth of 370,000 barrels per day next year — at 20.22m barrels per day — but EIA production forecasts could be in for mighty upgrades should Baker Hughes’ latest shocking release mark the beginning of a trend.

And looking further out, President Donald Trump’s plans to invest vast sums into the country’s oil and gas sector could really light a fire under US production. America’s new leader vowed to “take advantage of the estimated $50trn in untapped shale, oil, and natural gas reserves” in the country just hours after taking over the Oval Office.

President Trump has since vowed to resurrect the revive work on the Keystone XL and Dakota Access pipelines this week. This illustrates the importance the new White House administration places on fossil fuel production for the domestic economy — not to mention foreign policy — in the years ahead.

Too risky?

News that US production is rising will surely test OPEC’s desire to keep its supply accord running beyond the initial six-month trial period. Meanwhile Russia and other non-cartel members — some of which also agreed to reduce pumping activity — will also be watching closely, of course.

So the road back to roaring revenues growth is fraught with danger for majors like BP (LSE: BP) and Shell (LSE: RDSB). And when you also factor-in the huge capital drain associated with their operations, not to mention the hit and miss nature of oil exploration, these companies certainly carry their share of risk.

And I believe these dangers aren’t factored-in at current share prices — BP deals on a forward P/E ratio of 15 times, bang on the FTSE 100 prospective average, while its rival changes hands on a reading of 15.3 times. I reckon cautious investors should continue to steer clear of these stocks.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP and 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.

A drop in the ocean

The oil sector’s major players breathed a huge sigh of relief last week after OPEC — responsible for four-tenths of the world’s oil supply — confounded the expectations of many and agreed to cut its output.

Saudi Arabia brokered a deal that will see production fall by 1.2m barrels per day, to 32.5m barrels beginning in January. The news prompted Brent oil to top the $55 per barrel marker for the first time since the summer of 2016.

While a step in the right direction, there are doubts as to whether these cuts are swingeing enough to make a marked difference in eroding the oil market’s hulking supply/demand balance. Indeed, brokers at Marex Spectron believe a cut of around 2m barrels per day is required to improve the market’s poor fundamentals.

The huge political and economic considerations of last week’s agreed cuts are already casting a shadow over the current deal being extended beyond the middle of next year. Clearly it’s too early to claim that OPEC’s latest move will prove a game changer for the oil industry’s earnings outlook.

US plugging in

But the future of OPEC’s current agreement isn’t the only supply-side worry hanging over the oil market, with US producers already returning to work with gusto.

Baker Hughes data last week showed another three rigs being plugged back into the ground in the last week, taking the total to 477 units. This is now the highest level since January.

North American producers have been growing increasingly accustomed to operating in the sub-$50 per barrel environment. And the recent oil price bump is likely to see even more drillers getting back to work, putting hopes of a rebalancing of the oil market in 2017 under some stress.

Demand set to drag?

At the same time, predictions of a significant improvement in energy demand could also be considered on shaky ground.

The International Energy Agency (IEA), for one, has said that it expects global oil off-take to grow by 1.2m barrels per day in 2017, matching levels punched in the current year. This is down from 1.8m barrels in 2015.

The IEA commented that “there is currently little evidence to suggest that economic activity is sufficiently robust to deliver higher oil demand growth, and any stimulus that might have been provided at the end of 2015 and in the early part of 2016 when crude oil prices fell below $30 a barrel is now in the past.”

Too pricey

But in my opinion Shell’s share price fails to fairly reflect the colossal risks posed by a weak global economy and murky supply picture.

Last week’s fresh surge leaves Shell dealing on a forward P/E ratio of 25.8 times, sailing well above the FTSE 100 average of 15 times.

And while a 7.2% dividend yield blasts those of its big-cap rivals, I reckon the oil leviathan’s shaky earnings outlook and exploding debt pile could put hopes of another 188 US cents-per-share reward on the block.

I reckon the troubles facing Shell are too great to justify investment at the present time.

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Unilever set the klaxon off in October by playing hardball with Tesco and Morrisons, the Marmite maker hiking the prices of its premier products to offset the impact of a declining pound on its manufacturing costs. Since then Walkers and Birds Eye have also attempted to hike the cost of their blue ribbon goods, and more are expected to get on board in the coming weeks and months as Brexit issues intensify.

This comes as a particular problem to J Sainsbury (LSE: SBRY) which, unlike its FTSE 100 rivals, is still witnessing an exodus of its loyal customers to the likes of Aldi and Lidl. The grocer has canned ‘multibuy’ offers in recent months to bolster the bottom line, but this measure is merely driving more of its shoppers elsewhere.

While Sainsbury’s is to be applauded for adopting  such steps and attempting to build margins, the company’s failure to mitigate this programme through heavy brand  investment and product quality improvements is failing to resonate with customers.

Indeed, Sainsbury’s announced last week that like-for-like sales dipped 1% during the 28 weeks to September 24, a result that prompted underlying pre-tax profits to slump 10.1% to £277m.

The London-based chain announced plans to strip even more costs out of the system to combat its flailing top line, the firm earmarking another £500m of cost savings during the three years from fiscal 2018. But much of this hard work threatens to be undone by the rising price of stocking its stores.

I reckon the company’s poor revenues picture and uncertain cost profile makes it an unsuitable pick for cautious investors.

Black gold bothers

Hopes of a much-needed supply reduction from OPEC saw investors plough back into BP (LSE: BP) and its fossil fuel peers in recent months.

Such a move is clearly a huge gamble, particularly as previous rhetoric earlier in 20106 had failed to materialise. And while an accord is still a possibility at OPEC’s meeting on November 30, the fissures running through the cartel are becoming increasingly apparent — Iraq joined Iran, Libya and Nigeria late last month in calling for exemption from any output reduction, putting further onus on other nations to take the pain.

Besides, news that OPEC production hit a fresh record of 33.64m barrels per day in October — up 240,000 barrels per day from September — arguably reveals the group’s true appetite for implementing such a deal.

With US producers also plugging their apparatus back into the ground — latest Baker Hughes data showed the rig count up by two last week, to 452 — the oil market’s weighty surplus looks set to persist long into the future.

And aside from US President-elect Donald Trump, most of the world’s political leaders remain committed to introducing ambitious decarbonisation initiatives, threatening the long-term earnings potential of oil majors like BP.

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

Flagging fortunes

Well, aside from Standard Chartered (LSE: STAN), that is, as those seeking to reduce their exposure to ‘Brexit Britain’ have jumped aboard the emerging market-focussed firm.  Indeed, the stock’s value hit levels not visited since last October in recent sessions.

But those seeking bright earnings growth are in danger of suffering severe disappointment, in my opinion. Standard Chartered saw underlying operating income slump 20% year-on-year during January-June, to $6.8bn, as macroeconomic volatility in Asia and low interest rates took its toll.

And unsurprisingly the bank expects these problems to continue, advising that “we expect 2016 performance to remain subdued.” Standard Chartered’s long-running and extensive restructuring plan will have to ‘go gangbusters’ to turn around the firm’s flagging fortunes.

A forward P/E rating of 36.4 times is much, much higher than its banking rivals — Lloyds changes hands on a multiple of 7.6 times, for example — yet Standard Chartered’s outlook is also littered with plenty of trouble.

And I reckon this elevated rating leaves Standard Chartered in danger of a stunning retracement.

Crude concerns

A flurry of excitement over a possible OPEC output cap has sent investors piling back into Royal Dutch Shell (LSE: RDSB), the stock touching 21-month highs just last week.

However, I believe optimism that Shell’s earnings troubles could finally be over may be jumping the gun. Sure, Saudi Arabia and other key members may be doing their utmost to push a deal through, even exempting Iran, Nigeria and Libya from curtailing their own production goals.

But distributing the necessary cuts across the cartel will prove extremely difficult business. Indeed, Iraqi oil minister Jabar Al-Luaibi said just this week that he will fight any efforts to cut Baghdad’s allocated quota, citing the need for oil revenues to fight IS rebels in the country.

An accord at November 30th’s meeting is desperately needed to start taking chunks out of bloated global inventories, and particularly as other major producers ramp up their own operations. Latest data from oil services company Baker Hughes, for example, showed another 11 oil rigs added to the US count — the eighth straight weekly advance.

And these numbers are only likely to keep rising as oil prices remain around or above current levels of $50 per barrel, a situation that is likely to put any meaningful earnings recovery at Shell under severe strain.

And latest International Energy Agency (IEA) estimates on renewables cast a shadow over the long-term profitability of the oil industry. Thanks to rising environmental legislation and falling costs, global renewable energy capacity will surge by 42% by 2021, the IEA said, upgrading an estimate it made just last year by 13%.

Against this backcloth I believe Shell will struggle to return to the earnings-generating monster of previous years. And I reckon a forward P/E rating of 29 times fails to reflect the colossal challenges the driller must overcome to get the bottom line moving higher again.

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

Tesco has seen its stock value add a chunky 16% during the period. And the supermarket’s FTSE 100 peer has risen by almost a quarter since the bells rang-in New Year’s Day.

But I believe frothy buying activity masks both firms’ still-patchy earnings outlooks.

Shelve it

Shell’s ascent has been fuelled by improving investor optimism over the oil market’s enduring supply/demand imbalance. Indeed, speculation that Saudi Arabia and Russia were orchestrating a production freeze at the start of the year got Shell off with a bang.

And more recently, the oil major’s international bias has seen it emerge as a top pick for those fearful of a post-Brexit economic slowdown.

But a revenues bounce-back at Shell is far from assured, in my opinion. US drillers are picking up their tools again, and latest Baker Hughes data showed another seven rigs plugged back into the ground last week.

While the latest total of 414 units may be down 238 from the same point last year, signs that North American producers are acclimatising to the sub-$50 per barrel environment casts doubt over the oil market rebalancing within the next year, and with it hopes of a stunning top-line recovery at Shell.

Shell’s extensive restructuring programme is helping to strip costs out of the system, while new project start-ups — like its Stones project in the Gulf of Mexico, where production commenced this month — is making many investors hopeful that profits may begin chugging higher again.

But until global producers curb their market share grab and cap production, and demand markers pick up significantly, I reckon investors should give Shell extremely short shrift.

Till troubles

Meanwhile, Tesco’s enduring wretchedness at the checkout is hardly a ringing endorsement for those seeking exposure to the supermarket sector. The business saw British like-for-like sales growth slow to 0.3% during March-May, decelerating from the meagre 0.9% rise printed in the prior quarter.

And chairman John Allan spiked hopes that a bounce-back could be just around the corner. Speaking to The Telegraph about diving footfall at Tesco’s megastores at the weekend, Allan noted that “there is clearly excess space in food retail in the UK,” adding that “we have to work our way out of that and that will take a number of years.”

In the meantime, Aldi and Lidl are poised to ratchet up their presence in Britain’s high streets and retail parks, dragging even more shoppers from Tesco’s doors. And the intense competition in the white-hot online segment is likely to become even bloodier too, particularly as US internet giant Amazon has waded in.

Tesco is likely to maintain a programme of expensive intense cost-cutting to stop sales falling off a cliff entirely. In this climate, it’s difficult to see earnings at the Cheshunt chain snapping back any time soon.

The post Why it’s still far too early to buy Tesco plc and Royal Dutch Shell plc appeared first on The Twelfth Magpie.

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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.