Today I am looking at why BP (LSE: BP) (NYSE: BP.US) could be considered too good to pass up at current prices.
A bona-fide bargain?
BP continues to face a confluence of potentially earnings-shaking problems, ranging from the potential effect of accelerating market capacity on the oil price; the effect of Russian sanctions on Rosneft’s sales outlook (which BP part-owns, of course); and what the final bill for the 2010 Gulf of Mexico oil spill is likely to ring in at.
These fears have driven BP’s share price through the floor in recent months, and the oil leviathan has collapsed almost 10% from June’s four-year peak above 520p. Still, for many risk-receptive share hunters this current weakness could represent a prime buying opportunity.
Even though a backcloth of declining revenues is expected to drive BP’s earnings 36% lower during 2014, current projections leave the
business changing hands on a miserly P/E multiple of 9.9, just below the bargain benchmark of 10.
And next year’s predicted 8% earnings improvement pushes this lower still, to 9.2. Although this rebound can hardly be considered stratospheric, a price to earnings to growth (PEG) readout of 1.2 — just outside the value barometer of 1 or under — underlines just how cheap the fossil fuel giant is at the current time.
Meanwhile, City consensus also suggests that BP is a terrifically priced pick for income chasers, with the firm’s colossal cash reserves expected to keep dividends ticking higher through to the close of 2015 at least. Indeed, a predicted 6% uplift in the full-year payout during the current 12 months — to 39 US cents per share — is expected to prance a further 8% higher, to 42 cents, in 2015.
These forecasts produce meaty dividend yields of 5% and 5.2% respectively, not only taking out a prospective average of 3.3% for the FTSE 100, but a corresponding reading of 2.9% for the complete oil and gas producers sector is also taken to the cleaners.
Investors should of course take heed of the multitude of problems facing the oil industry, from fears over the long-term prospects of the oil price through to surging exploration and refining costs. Still, it could be argued that these problems are currently baked into BP’s share price, a situation which could make the company a genuine goldmine.
