Life as an investor in BP (LSE: BP) (NYSE: BP.US) has been tough of late. Shares in the company have fallen by 14% in the last three months alone and have shown little sign of a turnaround. Certainly, the wider market has been weak over the same time period, but has fallen by much less than BP, with the FTSE 100 being down 4.5% over the same time period.
The key reasons for the large fall in BP’s share price are further uncertainty surrounding Russian sanctions, which could hit BP hard due to its stake in Rosneft. In addition, BP failed in its most recent attempt to have compensation payments for the Deepwater Horizon oil spill clawed back.
Despite this, BP has huge potential and could return to its pre-oil spill high of 650p in 2010. Here’s how.
Strong Asset Base
Although BP’s asset base has been slimmed down since the Deepwater Horizon oil spill of 2010, it remains highly lucrative and has the potential to push BP’s bottom line upwards over the medium term. Certainly, BP is less nimble than many of its smaller rivals, but it has a diversity that remains very attractive. Furthermore, once compensation payments begin to tail off, BP could begin adding to its asset base once more as a result of its impressive cash flow.
Oil Price
Recent months have seen a number of oil companies’ share prices come under pressure. A key reason for this is simply a lower oil price, with it being consistently below $100 in the recent period. While this may remain so in the short run, OPEC has discussed the possibility of reducing supply so as to increase the price of oil. If this does occur (which seems probable in the long run), oil companies such as BP should naturally benefit, since it will increase revenue and do little to change production/exploration costs.
In addition, with the global economy continuing to show signs of improvement, demand for oil is likely to remain robust over the medium to long term.
Weak Sentiment
With sentiment in BP being at a low ebb, now could be a great time to buy shares in the company. For example, it trades on a price to earnings (P/E) ratio of 9.2. With the FTSE 100 trading on a P/E ratio of 13.2, there is significant scope for an upwards rerating.
Indeed, once BP is able to move beyond the current level of compensation payouts for the Deepwater Horizon oil spill and if the oil price does strengthen, then profitability could improve and sentiment could pick up. For BP to trade at 650p, its rating would need to move to 12.6 based on next year’s earnings (which are due to be 7% higher than this year’s numbers).
This seems to be very achievable and would still mean that shares trade at a large discount to the wider market. As a result, 650p looks to be on the cards and, as such, now could be the perfect time to buy a slice of BP
