Why BP plc Should Be A Winner Next Year

The recovery at BP plc (LON: BP) is set to carry on strong.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan does not own shares in BP.

More on Investing Articles

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

£5k in savings? Here’s a passive income ISA plan to consider

Interest rates from some cash investments might look good for passive income right now. But for the long term, I…

Read more »

Investing Articles

This major bank says the IAG share price is too cheap at 6.7x earnings

I believe the IAG share price will fly higher into 2025 and I’m certainly not the only one that thinks…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

If an investor put £5k in Nvidia stock just 3 months ago, here’s what they’d have now

Our writer takes a look at the extraordinary performance of Nvidia stock and considers whether he'd invest in the AI…

Read more »

photo of Union Jack flags bunting in local street party
Investing Articles

£1,000 invested in Persimmon shares before the UK election is worth this much now

The last few months have been a wild ride for Persimmon shares. Here's how our Foolish writer sees the state…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

2 FTSE 100 stocks with major red flags I’m avoiding for 2025

Jon Smith talks through a couple of FTSE 100 shares that he believes could underperform the broader index in the…

Read more »

Google office headquarters
Investing Articles

Google unveils new quantum chip! This FTSE 100 stock offers a cheap way for me to invest

Ben McPoland highlights a FTSE 100 stock that offers exposure to Google's parent company Alphabet and its efforts in quantum…

Read more »

Investing Articles

Can the stock market bull run continue in 2025? Here’s what the experts say

After a strong run for the stock market many investors are looking forward to further success next year. Harvey Jones…

Read more »

Dividend Shares

The FTSE 100 could trump the S&P 500 in 2025. Here’s why

Jon Smith explains why the S&P 500 has outperformed this year but flags up reasons why history might not repeat…

Read more »