While 2017 proved to be a solid year for Royal Dutch Shell's (LSE: RDSB) share price, I stick by my long-term cautious take on the business.
Thanks to a resurgent oil price, the FTSE 100 business saw its market value swell 6.4% last year. But investor appetite has soured since the end of January as the same old fears about serious crude oversupply have pushed Brent prices back below the $70 per barrel marker.
And this seen Shell give back all of last year's gains.
US production at multi-decade high
The spectre of this oil market surplus enduring long into the future is nothing new, of course. And so, in my opinion, last year's improvement in energy prices seems to be plenty of froth and little substance, leaving Shell in danger of sustained share price weakness.
I have long talked about the threat of resurgent US production swamping the market in the years ahead. Recent data has done nothing to soothe my concerns.
The latest rig count survey from Baker Hughes showed another seven units plugged in across the country's oilfields in the seven days to February 16. The total of 798 oil rigs is the highest number for almost three years.
North American producers have proved adept at pulling the black stuff out of the ground some way below current price levels of $65 per barrel, meaning that the number of rigs is only likely to continue growing.
Against this backcloth it should come as little surprise that the hype surrounding OPEC and Russia's second successive output freeze in the autumn has fizzled out.
Indeed, with the Energy Information Administration tipping US production to smash through the 10m barrel per day marker for the first time since the 1970s in the coming weeks, and the nation on course to take out the 11m barrier by the close of 2019, the States is threatening to overtake Saudi Arabia in the next few years.
Dividends in danger?
City analysts are forecasting earnings at Shell to rise 46% in 2018, and by an additional 10% next year. But with these estimates being built on expectations of a robust crude price they are clearly in danger of disappointing, at least in my opinion.
And a forward P/E ratio of 13.6 times -- while inside the widely-regarded value benchmark of 15 times or below -- would not protect the oil leviathan from sinking in the event of sustained oil price weakness.
What's more, the very real prospect of another oil price dive makes me very concerned over Shell's much-celebrated dividend yields which currently stand at 5.9% and 6% for 2018 and 2019 respectively.
Predicted dividends are covered by expected earnings just 1.2 times for this year and 1.4 times for 2019, well below the accepted security benchmark of 2 times.
And with the business also battling colossal operating costs and a hefty debt pile, and the colossal cash flows of recent times also in danger of slumping should oil prices indeed dive, suddenly Shell does not appear to be such a safe bet for income chasers.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.