Could Shares In BP plc And Royal Dutch Shell Plc Collapse By More Than A Third?!

Royston Wild explains why shares in BP plc (LON: BP) and Royal Dutch Shell Plc (LON: RDSB are in severe peril of a sharp correction.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares across much of the oil sector have received a massive fillip in recent months in line with a recovery in the crude oil price. After the Brent barometer shuttled from $115 per barrel last summer to multi-year lows around $45 in January, a subsequent reduction in the US rig count has underpinned a solid price recovery — indeed, the benchmark was recently trading around the $64 mark.

With investors hoping these measures will represent a sea-change in the oil market’s supply/demand dynamics from next year, shares in oil major BP (LSE: BP) (NYSE: BP.US) have flipped 10% higher since the turn of the year. Investor sentiment in Shell (LSE: RDSB) (NYSE: RDS-B.US) has wavered more recently, however, and the stock is now trading 11% lower from the close of 2014.

Crashing correction on the horizon?

However, I believe that both Shell and BP could still be considered as grossly overvalued, and a quick look at the earnings forecasts at both companies certainly backs this up. Based on projected earnings of 199 US cents per share for 2015, Shell currently changes hands on an elevated P/E multiple of 15.2 times, while its industry peer deals on a reading of 17.9 times amidst earnings expectations of 25.3p.

I would expect a reading closer to the bargain watermark of 10 times to be a fairer reflection of the risks facing the fossil fuel giants this year and beyond. Consequently I reckon Shell should be trading closer to 1,300p per share, a 35% downgrade from current levels around 1,990p. And BP is due for a colossal 48% cut to its current price, to 235p per share from 453p recently. 

Pumpers keep on pumping

And I believe that signs of worsening oil market fundamentals could put make such hefty falls a very real possibility. News agency Reuters claims to have seen a draft strategy this week from industry cartel OPEC, the document predicting that output from non-member countries will continue to steadily rise until 2017 at the earliest.

And OPEC remains reluctant to curtail its own pumping activity to defend market share — indeed, Iran’s deputy oil minister Rokneddin Javadi commented just today that an output reduction is unlikely to be agreed upon at the group’s June meeting.

Meanwhile, the steady stream of negative data coming out of commodities glutton China is exacerbating worries that supply levels will continue to outstrip global demand growth. Latest HSBC Manufacturing PMI numbers came in at 49.1 for May, the fifth month out of the last six that factory floor activity has been in a state of contraction.

Given these factors I believe that the world’s crude stockpiles are destined to remain at breaking point for some time to come. As a consequence I find it difficult to see how BP and Shell will turn around their battered bottom lines any time soon, while a flurry of asset divestments and reduced capex spend is casting a pall over their long-term growth prospects, too. In my opinion both stocks are in danger of a severe share price collapse as the oil market outlook becomes ever gloomier.

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.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »