BP plc Facing A 34% Earnings Drop!

The oil business can be unpredictable at the best of times, with no control over volatile world oil prices and upstream exploration costs often pretty variable.

BPTough time

And recent years have obviously not been the best of times for BP (LSE: BP) (NYSE: BP.US) anyway, not with the financial costs of the Gulf of Mexico disaster still hurting and still uncertain. Against that background, it’s perhaps not surprising that City analysts have been getting increasingly bearish in their stance on BP over the past 12 months.

A year ago, we had a consensus for 2014 earnings per share (EPS) of 61.4p, which would have represented a fall of 13% over 2013’s reported figure — though we have to remember that with so many one-offs on the books at the moment, year-by-year EPS movements will be erratic. But if that wasn’t bad enough, since then the 2014 forecast has been steadily downgraded to just 49p today — and that’s a 34% slump!

There’s a modest recovery of 5% currently penciled in for 2015, which suggests some hope of a recovery — but we still have a good way to go to December 2014 yet and there’s plenty of scope for further revision.

Healthy dividends

At least dividend forecasts are holding up pretty well, with around 24p per share suggested for this year. With the shares changing hands for 494p apiece, that would get you a yield of 4.9%, and that’s really pretty nice. It looks safe too, with predicted cover by earnings standing at a little over two times.

On the recommendation front, the pundits are remaining understandably cautious with 20 out of 36 giving BP a Hold rating. Uncertainty is what the City hates most, and with legal shenanigans in the US over the oil spill hard to predict, there’s still plenty of it around.

But 10 of them are moved to rate BP a Strong Buy, and I reckon they’re the ones who’ve got it right.

Oil wellThe shares are cheap

Even with the predicted earnings fall, BP shares are still on a forward P/E of only 10 for the end of this year, and that’s way below the long-term FTSE average of 14. And with 2015 estimates set to drop the rating as low as 9.5, BP shares just look way oversold to me — especially if you have a long-term horizon and can look past a tough 2014.

That’s why I have BP in the Fool’s Beginners Portfolio and I’m happy to keep it there.

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Alan does not own any shares in BP.