9.4 Million Reasons To Sell Royal Dutch Shell Plc, BP plc And BG Group plc

Royston Wild explains why Royal Dutch Shell Plc (LON: RDSB), BP plc (LON: BP) and BG Group plc (LON: BG) remain perilous investment picks.

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Crude prices have received a fillip since the start of the year amid signs that the severe supply/demand imbalance afflicting the market may be on the mend. Although the Brent benchmark collapsed from highs of $115 per barrel last summer to below $50 in January, prices have stabilised more recently and were last dealing around $55.

This renewed sentiment has been fuelled mainly by a steady drop in the number of shale rigs operating in the US — indeed, latest Baker Hughes data on Friday showed the rig count decline by a further 12 units during the prior seven days, to 813.

US shale sector keeps on pumping

Still, I believe that the earnings picture at industry giants like Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), BP (LSE: BP) (NYSE: BP.US) and BG Group (LSE: BG) remains on precarious ground as production from the world’s biggest oil consumer keeps on swelling.

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The US Energy Information Administration (EIA) has announced that total oil production in the country registered at an eye-watering 9.4 million barrels per day in February. This is just off the all-time peak of 9.6 million barrels punched during the 1970s, and the EIA expects this to keep on growing — an average daily production figure of 9.5 million barrels is pencilled in for 2016.

While it is true that Baker Hughes’ numbers on Friday showed the rig count fall for the 16th successive week last week, the number of rigs being unplugged last week registered at their lowest level since December. And as Investec points out, “with well productivity rising by 50% in 5 years, the free-fall in rig count does not imply an upcoming shale output collapse.”

Storage levels keep on bloating

Indeed, the glut of oversupply washing over the oil market was also underlined by US crude inventory numbers last week, which showed levels rise an additional 8.2 million barrels in the seven days to Wednesday. This represented the tenth weekly rise and pushed total inventories to some 466.7 million barrels, a fresh high since the early 1930s.

Strident US production is, of course, not the only bugbear for the oil market. Industry group OPEC has also vowed to keep output rattling higher as it bids to increase its market share, while sluggish global economic growth is failing to pick up the slack. I therefore reckon an environment of subdued crude prices is set to reign for some time to come, a terrifying prospect for the fossil fuel sector’s earnings outlook.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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