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Can 2015’s Laggard Royal Dutch Shell Plc Snap Back Next Year?

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I believe that Shell still has much further to fall.

By Royston Wild – Tuesday, 8 December, 2015

It has been a few months in coming, but crude oil prices finally crashed to fresh nadirs at the start of this week. The Brent benchmark toppled all the way back to within a whisker of $41 per barrel, taking out September’s lulls and marking the lowest level since 2008.

The black gold price has endured further pressure after industry cartel OPEC again refused to cut production on Friday, ignoring a steady stream of weak demand indicators and bloated stockpiles. Instead the group elected to intensify its market-share grab by raising its daily production target to 31.5 million barrels.

Adding to the gloom, Total chief executive Patrick Pouyanne — when asked about the direction of oil prices — said on Monday that “we don’t anticipate a recovery in 2016” as the market’s chronic supply/demand imbalance persists.

In 2016 the growth of capacity will still be larger than the growth of demand,” the Total man commented, adding that “I don’t know if the price will be at $40, $45, $50 or $60 per barrel.”

But the risks are clearly skewed to the downside, in my opinion, and should crude prices finally break below the psychologically-crucial $40 per barrel marker, then all bets are off as to how far prices could fall. Indeed, chatter is still circulating that Brent could skid all the way back to $20 in the coming months.

Shell on the slide

Given this stonking market imbalance, not to mention the likelihood of additional US dollar strength, I would not bet against further share price weakness at oil goliath Shell (LSE: RDSB). The company has seen its share price track crude values lower in 2015, and its stock is now dealing at a 32% discount to levels seen at the start of the year.

However, I believe that Shell still has much further to fall. The business was recently dealing on a prospective P/E rating of 12.7 times for 2015 due to an anticipated 40% bottom-line slip, and earnings look likely to fall again next year as the oil price tanks.

I would consider a reading below the benchmark of 10 times to be a fairer reading of Shell’s risk-heavy outlook. And while the firm has remained vigilant in slashing capex targets and offloading assets to ride out the storm, these measures are likely to mean little against a backcloth of collapsing crude prices. Shell recorded a colossal $7.4bn net loss in July-September as oil values sank.

FULL ARTICLE

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