2015 has been a terrible year for Big Oil, and BP (LSE: BP) is no exception. Over the nine months to the end of September, BP’s shares slumped by 20% but have since recovered some losses. After a near 20% gain since the 25 September, BP is only down 6.1% year to date.
However, if you include dividends BP’s total return is only -2.2% for the year, compared to the FTSE 100’s total return of -2.1%. So, BP is at least keeping pace with the index.
Nevertheless, for BP’s long-term shareholders, the company’s performance has been extremely frustrating. Indeed, over the past ten years BP’s shares have produced a total return of 0.7% per annum, compared to the FTSE 100’s total return of 5.1% recorded over the same period.
Over the past five years, BP returns are at least positive but they’re hardly anything to get excited about. Since the end of 2010 BP’s shares have produced a total return of 3% per annum, although once again an investment in the FTSE 100 would have produced a better return for investors. The FTSE 100’s five-year total return is 6.3% per annum.
If BP’s shares rallied back to 500p, it would alleviate some of the pain shareholders are facing. Excluding dividends, a rally back to 500p would mean that BP’s shares had produced a total return of 6.3% per annum for the past five years, level with the index.
And according to my analysis, BP shares are well placed to recover to 500p. You see, BP has transformed itself over the past five years. The company is hardly recognisable after the Gulf of Mexico disaster; it has sold off unproductive assets, built a healthy cash balance and restructured its production portfolio to high-quality assets. This proactive approach by the company means that it is better positioned than any of its peers to weather low oil prices. Moreover, when prices recover, BP is likely to see the fastest recovery in earnings.
That said, it’s up to the market to decide the price of oil — something BP has no control over. Still, if the company can prove to the market that its dividend is sustainable, the company’s shares will win favour with income investors.
At present, BP’s shares support a yield of 6.8%, almost double the FTSE 100 average. However, if BP can prove that this yield is here to say, income investors will buy in, and keep buying until the yield returns to a more normal level of around 5%. BP’s shares would have to hit 520p before the yield reached this level.
Management is already taking steps to reassure investors that the payout is here to stay. Capital spending has been slashed by a fifth for 2015 and BP has halted buybacks to free up more cash for the dividend.
So, BP’s shares do have the potential to return to 500p next year, if the company can prove to the market that its dividend isn’t going to be cut any time soon.
