Why the BP share price could hit record highs in 2019

Roland Head looks at the outlook for BP plc (LON:BP) and considers a small-cap that could explode.

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It’s been a good year for BP (LSE: BP) investors. The oil giant’s share price has risen to a post-2010 high of 595p, and is now 24% higher than one year ago.

What’s interesting is that BP shares are now within about 15% of their all-time high of around 700p. Today I’m going to ask whether this FTSE heavyweight could print a new all-time high in 2019.

I’m also going to look at a small-cap oil firm whose share price could double over the next 12 months.

Ignore the forecasts

Over the last 12 months, consensus forecasts for BP’s 2018 earnings have risen by 50% to $0.56 per share.

Historical data provided by Reuters shows that BP’s earnings have beaten quarterly forecasts consistently since mid-2017. Rising oil prices have added fuel to the fire.

Analysts have simply been playing catch-up.

Let the facts speak

The good news is that there are some hard facts we can use. Between 2010 and 2013, BP generated an underlying replacement cost profit — the most comparable measure — of between $13.4bn and $21.2bn each year.

In 2017, underlying replacement cost profit was just $6.2bn, less than half the minimum underlying profit earned during the last oil boom.

Why I’m bullish

The price of oil is still lower than it was in 2010-2013. But BP’s costs are also lower and the firm is now focused on maximising profits rather than just pursuing growth.

At the time of writing, the shares were trading on 14 times 2018 forecast earnings, with a 5.1% dividend yield.

My sums suggest that the group’s profits and dividend would only need to rise by another 15% to justify a share price of 700p.

Commodity producers always carry some risk. But with production and oil prices still rising, I think there’s a good chance that the BP share price will set new records some time soon.

A potential double bagger?

Small-cap Serica Energy (LSE: SQZ) is poised to become one of the beneficiaries of BP’s decision to exit older North Sea assets. The company expects to complete a deal to buy stakes in the Bruce, Keith and Rhum (BKR) fields from BP and French firm Total at the start of November.

Serica will then be entitled to a share of net cash flows from the fields from 1 January to the completion date.

These two deals are expected to increase the group’s proven and probable reserves from 3m barrels of oil equivalent (mmboe) to 60mmboe. Impressively, this has been done without raising debt or issuing new shares.

The firm reported a loss for the first half of 2018 today, as production from its Erskine field has been suspended due to a pipeline fault. However, this is one case where analysts’ painstaking calculations can be useful.

Forecasts for the full year — including cash flow from BKR — suggest Serica could generate earnings of $0.41 per share in 2018, if the deal completes as expected.

These projects put the stock on a forecast P/E of just 2.8, falling to a P/E of 2.2 in 2019.

Such a low valuation multiple is unlikely to be sustainable. If the BKR deal delivers as expected, I believe Serica’s share price could quickly double from current levels, to reflect the expanded firm’s profits and cash generation.

That’s why I rate this stock as a speculative buy.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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