94 Reasons Why BP plc Is A Cast-Iron Sell

In this article I am looking at how poor oil price forecasts are set to hit BP’s (LSE: BP) (NYSE: BP.US) revenues outlook.

Oil prices expected to tank

A flood of new oil supply in coming years is expected to become an increasingly prominent bugbear for the world’s giant oil producers, a terrifying sign for the likes of British fossil fuel leviathan BP.  With industry brokers across the globe continuing to slash their price forecasts — indeed, Bank of America-Merrill Lynch now expects West Texas Intermediate (WTI) crude to average just $94 per barrel in 2014 — BP could be set for a period of extended top-line turmoil.

Bank of America’s mooted average for this year compares starkly with a current price of $102, and the broker expects the black gold price to slide further next year to $91 per barrel. And the broker has even warned that prices could even fall as low as $50 within the next 12-24 months.

The firm’s analysts expect a backcloth of surging Western production — particularly from US shale supplies — combined with the BPpotential for rocketing OPEC output and sluggish demand growth to significantly put the dampeners on oil prices in coming years.

BP announced in April that replacement cost profit tumbled 80% during January-March, to £3.5bn, as total income slumped 13% to $93bn. On top of the effect of asset divestments, the oil giant is also suffering heavily from weak refining margins and poor worldwide demand for its products.

City forecasters expect BP to experience a colossal 34% earnings drop in 2014, with just a 5% bounceback predicted for the following 12-month period. These projections leave the company, at face value, dealing on terrific P/E multiples of 10.5 and 10 for these years, on the cusp of the bargain benchmark of 10 times prospective earnings or below.

But with fears over the possible implementation of trade sanctions on Russia’s Rosneft — in which BP holds a 20% stake — and a variety of legal issues including the 2010 Deepwater Horizon case looming large, in my opinion BP remains at massive risk of heavy earnings forecast downgrades in the near term.

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> Royston does not own shares in any of the companies mentioned in this article.