With the oil price having staged something of a minor rally in recent weeks, BP (LSE: BP) (NYSE: BP.US) has been able to outperform the FTSE 100 year-to-date. Of course, that doesn’t quite make up for 2014’s disappointing performance but, since the start of the year, BP is up 9% while the FTSE 100 has risen by 5%.
Looking ahead, can BP really keep up its outperformance of the UK’s leading share price index?
Oil Price Prospects
Clearly, predicting the future course of the oil price is somewhat challenging (if not impossible). However, it is unlikely to stay this low for too long, since it is uneconomical for a vast number of producers to operate at the current price level and, as such, in time there is likely to be a reduction in supply. Similarly, with the oil price being so low, demand is likely to increase and, over the medium to long term, a higher oil price seems to be a view that is held by most investors.
And, even if the oil price does not make much ground this year, even a stabilisation of it could send BP’s share price higher. That’s because BP’s current valuation appears to take into account more bad news regarding the oil price, so anything but further falls could cause the company’s valuation to move upwards.
This low valuation is perhaps best evidenced by BP’s current dividend yield. It stands at a whopping 5.8%, which is considerably higher than the FTSE 100’s yield of around 3.3%. Furthermore, BP’s payout ratio is fairly modest at 59%, which means that its high yield is more likely a function of a low share price as opposed to the company paying out a large proportion of earnings as a dividend.
Looking Ahead
With UK interest rates likely to remain at 0.5% (or lower if deflation takes hold), high yield stocks could become very appealing to investors seeking a decent income. So, the fact that BP’s share price is cheap and also offers a top notch yield could cause investor sentiment to improve significantly, thereby pushing the company’s share price higher. And, with BP’s CEO, Bob Dudley, managing expectations regarding the future price of oil, BP could surprise on the upside during the rest of 2015.
Of course, a savage fall in the oil price is likely to mean that BP underperforms the FTSE 100 this year but, so long as the price of ‘black gold’ doesn’t fall too far, BP looks set to be a top notch performer that continues to beat the wider index this year.
