Why BP plc Will Eventually Come Good

Just a few days ago, a US judge refused an application made by BP (LSE: BP) (NYSE: BP.US) to halt compensation payments to US businesses that suffered as a result of the tragic oil spill in the Gulf of Mexico in 2010.

The reason for the application was a firm belief by BP that various lawyers and businesses were submitting (and receiving payouts) on dubious claims as a result of BP signing too generous an agreement in the aftermath of the tragedy. This apparently overly generous agreement was agreed to at a time when BP’s reputation was in tatters and it was coming under pressure from all sides, notably from the US President.

As a result, BP is continuing its fire-sale of assets, meaning that when the dust finally settles the company will be substantially smaller than it was before the oil spill. Indeed, the sale of more assets seems to be priced in as BP trades on a price-to-earnings (P/E) ratio (using adjusted earnings per share) of just 8. This compares favourably to the oil and gas industry group, which has a P/E of 9.1, and to the  FTSE 100, which trades on a P/E of 13.3.

In addition, shares yield an impressive 4.5%, with dividends forecast to increase from 21p per share in 2012 to 25p per share in 2014.

However, in my view, the current valuation is simply too low. Certainly, BP may need to continue to sell assets to foot the bill but this remains a highly profitable company that will continue to hold a diversified, albeit smaller, range of quality assets across the globe.

Indeed, investor sentiment may be at a low ebb but is unlikely to remain so in the long run. Although the compensation claims will not cease overnight, BP is likely to return to a far more stable operating environment and, when it does, investor sentiment could shift considerably. An impressive yield, more streamlined and efficient asset base, as well as a valuation that is considerably lower than peers, mean that money could soon start to flow into BP as well as out of it.

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> Peter owns shares in BP.