British majors Royal Dutch Shell (LSE: RDSB) and BP (LSE: BP) have seen their share prices slip 10% and 7% respectively during the past six weeks, for example. And I believe a sharper retracement could be just around the corner.

Stocks keep surging

Broker predictions that the oil market is set to balance later this year are being put under increased scrutiny as already-plentiful stockpiles continue to build.

The US Energy Information Administration advised on Wednesday that the country’s inventories sucked in a further 2.3m barrels of crude over the past week, taking the total to 525.1m barrels and once again confounding analyst predictions — a more modest 1.1m-barrel build had been anticipated.

Putin speaks

On the plus side, the market remains hopeful of a much-needed supply freeze from OPEC and Russia to boost Brent prices. And Vladimir Putin gave these hopes a shot in the arm on Friday when he told Bloomberg that “it would be correct to find some sort of compromise.”

But critically Putin cast doubts on Iranian participation as the country repairs the damage caused by years of sanctions by steadily raising its own output. Tehran’s reluctance to turn down its own pumps is likely to put paid to any deal.

A production cut touted by Saudi Arabia, Qatar, Venezuela and Russia earlier this year failed to materialise as the faultlines across the Middle Eastern bloc became increasingly apparent. Besides, production from both OPEC and Russia has hit record levels in the months following these initial rumours, scotching rhetoric pointing towards a potential accord.

And a steady rise in the US rig count further undermines hopes of a tough rebalancing act being successful — Baker Hughes data has shown rig numbers rise during eight of the past nine weeks.

Rotten value

I believe that investors are still failing to fully consider these factors, particularly when you look at Shell and BP’s gargantuan earnings multiples.

Conventional wisdom suggests that a reading of 10 times or below is fair value for stocks with uncertain earnings outlooks and/or high risk profiles. Yet for 2016, BP changes hands on a ratio of 31.8 times. And Royal Dutch Shell deals on an even-worse reading of 25.7 times.

Of course many investors are prepared to suck up hefty near-term earnings multiples in exchange for the promise of stunning bottom-line growth over a longer time horizon.

But neither Shell nor BP can offer these guarantees, in my opinion. Both companies continue to reduce capex budgets, slash jobs and jettison ambitious projects like Shell’s Alaskan drilling venture to shore up their balance sheets and ride out the current oil price storm.

And the swinging momentum away from ‘dirty’ fuels such as oil and towards alternative methods like wind and solar provide further roadblocks to growth for the fossil fuel majors in the coming years.

I expect earnings, and with it the stock prices of BP and Shell, to come under increasing pressure in the immediate future and beyond.

The post Why I’m expecting Royal Dutch Shell plc and BP plc to plummet! 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 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.

Indeed, fossil fuel giant Shell (LSE: RDSB) saw its share price slip just 0.3% on the day. This is despite wide risk-aversion pushing Brent back below $50 per barrel, the crude benchmark shedding 5% of its value to rest at $48.50.

Steady… for the moment

To some market commentators, however, the resilience of Shell et al came as little surprise.

PwC analyst Alison Baker commented that “the oil & gas industry is a global business and as a result should be less impacted by [Friday’s] EU referendum result.”

And Baker noted that “we’ve seen the industry… demonstrate its resilience in dealing with volatility and uncertainty through past and current oil price shocks,” adding that “we are convinced that they can do so again.”

But this isn’t to say troubles won’t be encountered further down the road, Baker noted, warning that signs of further economic hardship or crude price volatility could heap fresh pressure on the sector.

Rigged up

Such problems are a very likely possibility, in my opinion. Aside from the shock to the global economy delivered by the upcoming Brexit, worsening supply/demand indicators threaten to keep crude under the cosh for some time yet.

Sure, latest Baker Hughes data released on Friday showed the US rig count dip again. But this follows three straight rises on the bounce, indicating that an oil price around or above the psychologically-critical $50 level is attractive enough for North American drillers to return to work.

And with OPEC set to keep disappointing those hoping for an output freeze in the coming months, I believe there’s plenty of scope for oil prices to keep toiling.

Poor value

Despite these concerns, the City expects Shell to shift back into the black during 2016 following four years of heavy earnings dips.

Indeed, earnings are expected to detonate to 102 US cents per share, up from 31 cents in 2015.

However, this projection still leaves Shell dealing on a P/E rating of 25.2 times, sailing outside the benchmark of 10 times indicative of stocks with high risk profiles like the black gold giant.

A subsequent rerating of the share price would leave Shell dealing at just 748p per share. This represents a shocking 60% markdown from current stock values around £18.80.

Dividend in danger?

As well as the prospect of yet more disappointing supply data, Shell could also see investors head for the exit should it slash the dividend, as has been touted in many quarters.

Broker consensus suggests that Shell will keep the payout locked at 188 US cents per share through to the close of 2017, a figure that yields a stunning 7.2%.

But with the fossil fuel giant battling a gigantic $70bn debt pile as well as a sickly revenues outlook, I believe asset sales alone may not be enough to keep the balance sheet afloat, and that dividend cuts could still be on the cards.

The post Why Royal Dutch Shell plc’s share price could collapse 60%! appeared first on The Twelfth Magpie.

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Unsurprisingly, many of the Footsie’s oil and gas producers have been caught in the updraft. Shell (LSE: RDSB), for example, has seen its share price stomp 24% higher during the period. And while appetite for BP (LSE: BP) has been more volatile, the stock has still gained 4% in value from late January.

However, I believe this buying frenzy leaves both stocks looking seriously overbought.

Capex cuts illustrate patchy confidence

The muddy outlook for the fossil fuels industry was again laid bare by BP’s first-quarter results released yesterday.

Sure, the company may have seen underlying replacement cost profit improve to $532m during January-March, up from $196m in the final quarter of 2015. But BP warned that operational budgets could be cut again should an environment of low oil prices persist.

The London-listed firm — like most of its peers — has embarked on aggressive cost-cutting and asset shedding to mend their battered balance sheets. So news that BP could now slash organic capital expenditure to as low as $15bn in 2017, down from an anticipated $17bn for this year, shows that the industry remains braced for further pain.

Stockpiles growing

And BP is quite right to be concerned, in my opinion, as the recent ascent in crude prices continues to defy the broader fundamental picture.

A failure by OPEC members Saudi Arabia, Qatar and Venezuela to freeze production along with Russia earlier this month is likely to keep the market swimming in excess oil.

The political and economic fault-lines fracturing the cartel mean that an agreement to reduce capacity is as far away as ever, with Iran, for one, determined to keep ramping up production until it hits pre-sanction levels. As a consequence Tehran’s output is expected to continue rising until the middle of next year.

Global stockpiles are in desperate need of relief, latest data from the Energy Information Administration showing levels at US storage tanks hit a fresh record of 540.6m barrels last week. And insipid aggregate demand is hardly helping the situation, either.

Shockingly poor value

Against this backcloth, I believe the resurgent oil price — and with it the share prices of Shell and BP — is in danger of suffering an extreme reversal.

Indeed, BP currently changes hands on a P/E rating of 39 times for 2016, sailing way above the threshold of 10 times that is indicative of stocks with higher risk profiles. And Shell deals on an earnings multiple of 25.9 times.

This leaves plenty of room for a correction, in my opinion, a scenario that could very easily transpire, should industry newsflow continue to disappoint and Federal Reserve rate hikes bolster the US dollar.

The post Don’t be a fossil! Why I’d still sell BP plc & Royal Dutch Shell plc appeared first on The Twelfth Magpie.

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• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
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• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

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.

Financial fears

Battered banking play Standard Chartered (LSE: STAN) has managed to defy gravity in recent times, the stock galloping higher despite escalating fears over economic cooling in Asia.

Indeed, the firm has gained 20% in value during the past three months, the company’s value surging in lockstep with a strong uptick in commodity prices. One source of revenues troubles at Standard Chartered has been the steady erosion in metals and energy prices. But the Brent benchmark’s surge back towards $50 per barrel has led many to speculate that these troubles may finally be behind the bank

Shares in Standard Chartered leapt yesterday following results that showed the bank swing to profits of $589m during January-March, improving from losses of $4.1bn in the prior quarter.

But Standard Chartered warned that “depressed commodity prices, volatility in Chinese markets, weak emerging market sentiment and concerns around interest rate and other policy actions” continue to circulate, providing plenty of red flags that could significantly hamper the bank’s recovery.

A huge decline in impairments is of course a welcome step in the right direction — these fell to $471m in the first quarter from $1.1bn between October and December. And massive restructuring that will see 15,000 roles slashed during the next few years is also raising hopes of a marked turnaround at the bank.

However, the scale of financial turbulence in Asia may significantly hamper any revenues recovery at Standard Chartered further down the line, particularly as the firm drastically reduces its presence in these growth regions. And of course the chronic supply/demand balances washing across the commodities sector casts a huge shadow over the bank’s turnaround story, too.

The City expects the financial giant to flip from losses of 6.6 US cents per share in 2015 to earnings of 27.9 cents this year. But this figure creates a huge P/E rating of 43.4 times. Considering the numerous challenges Standard Chartered still faces, I believe such a reading is ridiculously high, and reckon that now is the time for savvy investors to cash out.

On shaky ground

Like Standard Chartered, fossil fuel giant Tullow Oil (LSE: TLW) has seen its share price explode despite its dodgy revenues outlook. The firm’s share price has rocketed 66% since the end of January, with Tullow Oil unsurprisingly also fuelled by the impressive recovery in fossil fuel values.

But crude’s ascent has been underpinned by fragile hopes of an output freeze by Russia and the OPEC cartel, speculation that is yet to come to fruition. Meanwhile, global crude inventories continue to tick steadily higher as patchy demand persists.

Tullow Oil saw net debt balloon 30% in 2015 to stand at a colossal $4bn by December, the result of colossal capex costs in a low oil price environment. So while recent oil price rises may provide some respite, Tullow Oil remains on shaky ground in my opinion.  

The number crunchers may expect the oil producer to snap from losses of 113.6 US cents per share in 2015 to earnings of 8.6 cents this year as its TEN project in Ghana comes online. However, I believe a consequent P/E rating of 84.1 times is far too high given Tullow Oil’s muddy earnings outlook, leaving in danger of a harsh share price retracement.

The post Why now is the perfect time to sell Standard Chartered plc & Tullow Oil 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 Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Since striking five-and-a-half-year troughs of 310.25p per share back in February, BP has seen its stock value appreciate 15% as Brent crude has reclaimed the $40 per barrel marker.

Not only do I believe that this bullish buying behaviour is unwarranted, but I reckon BP should actually be dealing at just one-third of its current share price.

Risky AND costly

This statement may appear a step too far at first glance. But hear me out.

Conventional thinking suggests that stocks with high-risk profiles like BP should be dealing on a P/E rating of just 10 times or below.

And even though City consensus suggests the oil colossus will swing from losses of 35.39 US cents per share last year to earnings of 17 cents in 2016, this still results in an elevated earnings multiple of 28.7 times.

A share price rerating to bring it in line with the benchmark of 10 times would leave the business dealing at just 120p per share, representing a 66% reduction from current levels around 355p.

Pumpers keep on pumping

So great are the hurdles facing BP and its earnings outlook that a reading around this figure is only fair value, in my opinion.

Brent values began their ascent in February on hopes that a touted supply ‘freeze’ between OPEC members Saudi Arabia, Qatar, Venezuela and non-group member Russia would lead to a much-needed production cut.

The reception by other OPEC producers has been less than encouraging, however. Iran and Libya have already poured scorn on the idea, with the former pledging to return pumping to pre-sanction levels in the months ahead.

And as US production also heads steadily higher, a rapid improvement in oil consumption is needed to gobble up ample global inventories.

But a deteriorating Chinese economy means that global demand looks set to worsen, not improve — indeed, China’s imports of the black stuff sank to three-month lows of 26.69m tonnes in January.

Long-term concerns

Of course investment decisions should be based on a long-term time horizon, and many stock pickers will be looking past BP’s earnings outlook for this year and possibly 2017.

Still, the oil giant’s earnings outlook for the coming years can’t be considered anything worth writing home about either.

Even once commodity prices recover, a stream of huge asset sales and capex reductions is likely to significantly hamper BP’s ability to reap the rewards. Furthermore, schemes to reduce carbon emissions across the globe create a further problem for BP’s long-term revenues picture.

Look to Lonmin

Anyone scoffing at my bearish call on BP’s share price should take heed from platinum giant Lonmin’s (LSE: LMI) collapse of recent years.

The company was dealing around £17.80 per share just five years ago, but a combination of sinking metal prices and vast operational costs has left the business clinging to life. Lonmin was recently dealing at just 127p per share, a couple of rights issues in recent times helping to keep the wolves from the door, at least for the time being.

Given the precarious state of BP’s earnings outlook, I believe that shares in the oil colossus are also in danger of entering freefall, and that risk-intolerant investors should steer well clear of the stock.

The post Could BP plc REALLY Topple Back To 120p? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

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.