Energy giant BP’s (LSE: BP) stock price has trended lower in recent weeks as fresh fears over the oil market’s chronic supply imbalance has crimped investor appetite.

Brent’s prior gallop back towards $50 per barrel dragged many of the Footsie’s drillers with it, BP included, and the London firm struck four-month highs above 380p per share in late April. And with news from the oil industry remaining murky at best, I believe BP’s share value is in danger of heading through the floor.

Take stock

The market cheered news of a rare decline in US inventories this week, the Energy Information Administration advising that domestic stockpiles fell by 3.4m barrels in the week to 6 May.

But investors shouldn’t read too much into the data. Indeed, this represented the first stock drawdown since March, and a significant uplift in demand — or indeed a massive supply reduction — is needed to cut total levels from near-record highs of 540m barrels.

Such a scenario remains very much remote, however. Severe economic cooling in China has seen crude imports sink more recently, while output from OPEC producers and from Russia keeps on climbing.

Mighty multiples

In this environment I’m convinced BP’s high-risk profile is inadequately factored-in at current share prices. Sure, the City may be expecting the company to flip from losses of 35.39 US cents per share in 2015 to earnings of 17 cents in the current period.

But this projection still creates a hefty P/E rating of 30.3 times, sailing well outside the benchmark of 10 times that’s indicative of stocks with poor earnings prospects such as BP.

A share price rerating to bring BP in line with this reduced multiple would leave the company changing hands at 119p per share, representing a colossal 67% discount to current prices around 360p.

Of course many embattled stocks still merit elevated near-term multiples should they carry solid long-term earnings prospects. But I don’t believe BP falls into this category. Indeed, the vast scale of capex-cutting and asset-selling at the firm is likely to significantly hamper any earnings recovery once oil prices start to rise again.

Payout problems?

And BP’s share price could also come under severe attack should the business finally bite the bullet and cut the dividend.

BP surprised many last month by choosing to maintain the quarterly payout at 10 US cents per share, with the firm instead floating the idea of extra budget cuts to shore up the balance sheet.

But such measures have already proved ineffective in stopping BP’s debt pile exploding in the low-oil-price environment — the energy play’s net debt rang in at an eye-watering $30bn in March, increasing from $25.1bn a year earlier.

And the company’s financial health is likely to deteriorate further as revenues lag and BP’s capital-intensive operations weigh. In this respect investors should be on guard for a massive payout reduction sooner rather than later, and with it a potential share price crash.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.