A 72% drop in second quarter earnings for Royal Dutch Shell will be a shock to many investors who have long considered the energy giant as a ‘must have’ blue chip share for their portfolios. Much has been made about its ongoing commitment to paying out dividends, for example. But Shell, like its competitors, seems to have been hit hard by the fall in the oil price.
Oil was trading at $43/bbl this week, and no follower of the energy market can ignore the fact that at those levels, the energy industry is going to struggle. Oil majors like BP and Total have also announced drops in earnings, and the market was braced for bad news from Shell.
At time of writing Shell had closed for the day at 1,984, down 2.98% for the day. Early losses had been somewhat alleviated by buying during the afternoon.
Major oil firms are having to cut back on their spending – for example, Shell said it would be spending 38% less this year than the combined expenditure of Shell and its recent acquisition, BG.
Ipek Okardeskaya, analyst with LCG, said most brokers were recommending Shell as a buy at current levels, with a 12 month target price of 2,148. However, she also said that “we could expect a deterioration in this picture as today’s negative surprise could bring some brokers to revise their recommendations.”
However, investors most not ignore the fact that Shell is heavily dependent on oil prices. The stock’s performance is going to hinge on whether or not global oil prices will pick up over the next two quarters. At the moment, without better coordination on the part of OPEC, and in particular from Saudi Arabia, it looks like the energy sector will continue to struggle.