Do BP plc’s Fears Of Low Oil For 3 Years Spell Doom?

What’s bad news for BP plc (LON: BP) should be good for Centrica plc (LON: CNA).

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Oil prices could remain around today’s prices for up to three years, according to BP (LSE: BP)(NYSE: BP) chief Bob Dudley, which sounds like it could mean disaster for the oil industry.

Speaking to the BBC, Mr Dudley suggested petrol prices could drop to £1 per litre, so it’s not bad news for everyone. But BP itself is planning to rein in its capital expenditure and has already cut jobs in its North Sea operations, while Royal Dutch Shell has canned a planned development in Kuwait.

Share price holding up

Coming on the back of the latest legal findings in New Orleans — that the Gulf of Mexico oil spill released less oil than had been claimed and the fine should be lower than feared — Mr Dudley’s latest warning does not seem to have affected BP shareholders too much. The share price is actually up 14% since mid-December, so the adverse effect of prolonged cheap oil has already been accounted for, it seems.

But even after an expected fall in EPS of nearly 50% for the year just ended, followed by a further 20% currently forecast for 2015, BP shares would still be on a P/E of just under 13. That’s barely below the FTSE 100‘s long-term average of around 14, and the longer the black stuff remains at around $50 a barrel, the more pressure we’ll surely see on BP’s share price.

Forecast dividend yields are still very high, with more than 6% penciled in for 2014 and the following two years, but they’d be very poorly covered by earnings. We’d see only 1.3 times based on 2015 forecasts, and there must be an increasing chance of the cash being cut the longer the gloom continues.

Who will win?

The other side of the coin is that low energy costs should be good for utilities, like British Gas owner Centrica (LSE: CNA)(NASDAQOTH: CPYYY.US).

Sure, they’re already under pressure to cut retail costs in response to falling oil, and British Gas has just pledged a 5% cut. But it’s possible to do that while still having room for improved margins. It was expensive oil that led to an effective price freeze, as it was politically unacceptable to raise prices especially so close to an election, and an extended period of cheaper wholesale energy could take the pressure off.

The Centrica share price has dipped a bit of late, losing 16.5% over the past 12 months. But dividend yields are still high at more than 6% (and cover doesn’t need to be high), and if cheap oil should help boost earnings forecasts a little over the next couple of years we could be looking at a bargain.

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

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