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Shell results should reverse share decline

Questor share tip: Shell results should reverse share decline

Investors in Royal Dutch Shell must have been very relieved that the recent oil spill in the Gulf of Mexico was nothing to do with them. The oil came from “natural seepage” from the sea floor.

By 7:00AM BST 22 Apr 2012

Questor says BUY

However, the news hit the shares hard. Indeed, the shares have been on the slide all year, despite the price of Brent crude being above $120 for much of the year on concerns over supply from the Middle East and North Africa. They hit a high of £24.89 on January 10.

Credit Suisse recently increased its 2012 Brent crude forecast to $125 a barrel, with $132.5 in 2013 and $135 in 2014, citing a lack of supply and continued growth in demand.

Questor expects that next week’s first quarter numbers, released on Thursday, will put a stop to the share price slide. Indeed, Shell’s results could be the strongest of all the integrated oil companies posting next week.

However, it is clear that the oil price cannot go much higher than current levels without serious consequences. Any spike higher is likely to lead to “demand destruction” where high prices prompt less usage. This means that the momentum in earnings growth for all majors is likely to peak – unless production can be increased sharply.

Shell is investing to increase output. Peter Voser, chief executive, revealed this week that the company is looking at projects worth around $4bn (£2.5bn) to boost oil production in Nigeria and cut flaring of associated natural gas.

After the recent falls, investors can now buy into the shares and secure a yield of 5.1pc.

Last tipped at £22.94½ at the start of February, the shares remain a buy.

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