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Why BP plc Should Be A Winner Next Year

BP

The oil and gas business can be a risky one, but in my examination of next year’s prospects for some of our top FTSE 100 shares I haven’t looked at a company in that sector yet. But I’m putting that right today with an examination of BP (LSE: BP) (NYSE: BP.US).

As expected, the company’s fundamentals over the past few years have been dominated by the effects of the Gulf of Mexico disaster. Here’s what the record looks like, together with forecasts for the next two years:

Dec Pre-tax EPS Growth Dividend Growth Yield Cover
2008 $34,283m 113c +4% 55c  – 6.4% 2.1x
2019 $25,124m 89c -21% 56c +1.8% 5.7% 1.6x
2010 -$4,825m -20c n/a 21c -62.5% 2.8% -1.0x
2011 $38,834m 136c n/a 29c +38% 3.9% 4.7x
2012 $18,809m 61c -55% 34c +17% 4.9% 1.8x
2013* $14,319m 77c +27% 37c +9% 4.8% 2.1x
2014* $16,467m 87c +15% 40c +8% 5.2% 2.2x

* forecast

Now, that’s not a pretty picture at first sight. But if we take a closer look it reveals something quite remarkable…

Disaster

In 2010 BP was hit by a disaster resulting in the largest offshore oil spill in US history and was subsequently hit with costs of more than $40bn — but just two years later it was already recording decent earnings again and was back to offering a dividend yield of nearly 5%, with nice earnings and dividend growth forecast for the next two years. Just how did it manage that?

Well, one thing all this shows is that in this business it pays to be big — not many smaller oil producers could have survived such a calamity. Sure, BP had to sell off a lot of assets to raise the cash, but it was a relatively small drop in the ocean — as my Fool colleague Rupert Hargreaves observed last week, BP’s shareholder equity is still close to 2005 levels.

Profits will take more time to recover, but an ambitious share buyback programme has helped boost earnings per share. BP, it seems, recognizes an oversold share price when it sees one. And I agree — I added BP to the Beginners’ Portfolio in August 2012, though it hasn’t made us any real gains yet.

Fundamentals looking good

According to City analysts, BP really should be a winner on the earnings and dividends front next year, so what evidence is there to support them?

Third-quarter results released in October showed a 20% fall in underlying replacement cost profit for the first nine months, and that’s pretty much in line with full-year forecasts. And the firm paid a quarterly dividend of 9.5 cents per share, which is in line with payments for the first two quarters and 12.5% ahead of Q3’s payment a year ago. The same percentage rise in the full-year dividend would actually beat the current forecasts, so those 2014 predictions could well turn out to be a little conservative.

Shares on the up?

What are the prospects for the share price?

At around 470p, it still has some way to go to regain its pre-crash levels, but it is close to a 50% gain since its bottom in 2010.

And the forecasts above put the shares on a prospective P/E of under 10 for December 2013, which is significantly below the FTSE’s long-term average of around 14 — and it drops to under 9 based on 2014 predictions.

To me, that’s just too cheap.

Verdict: BP looks set to bounce back!

And finally...

BP has a long track record of paying good dividends, and it's clearly returning to those ways. If you want to learn how to identify great long-term dividends yourself, have a look at the new Motley Fool report "How To Create Dividends For Life", which gives you 5 Golden Rules for Building a Dividend Portfolio.

It's completely free, so click here to get your copy while it's available.

Alan does not own shares in BP.