How BP plc Could Surge 70% In 5 Years

BPThe shares of oil supermajor BP (LSE: BP) (NYSE: BP.US), currently trading at 508p, have gained just 2% over the last five years, well behind the FTSE 100, which has put on 57%.

However, the story could change over the next five years, as BP’s shares have the potential to advance by 70%.

Here’s how

The Deepwater Horizon rig explosion and resulting massive oil spill in the Gulf of Mexico just over four years ago have blown a hole in BP’s five-year share performance. That the price has advanced at all, given the huge financial liabilities and reputational damage suffered, is testament to the durability of big companies, even in the face of extreme circumstances.

As a result of the oil spill, BP was obliged to embark on a huge divestment of assets and restructuring, becoming a smaller, leaner company. In some ways this has proved to be a blessing in disguise. Industry-wide pressures, including rising exploration costs, have seen all the big oil companies moving to shed non-core assets and focusing on their most profitable projects.

While BP has further asset sales in the pipeline, and the legacy of the oil spill will run for many years, most of the heavy work is behind the company, and City analysts see steady earnings progress over the next five years.

The analysts are forecasting that BP’s earnings per share (EPS) will increase at a compound annual growth rate (CAGR) of 4.7% from last year’s 43p to 54p by the year ending December 2018 — a total increase of 26%.

If the shares track earnings, and continue to rate on their current trailing price-to-earnings (P/E) ratio of 11.8, the price will of course rise by the same 26% as EPS, putting BP’s shares at about 638p.

However, visibility on the go-forward BP’s asset base, earnings, as well as the quantum and timing of remaining oil spill-related payouts, should be improving all the time, and it may be that the shares have re-rate higher after the passage of five years. If they re-rated to the FTSE 100’s long-term historic average P/E of 16, we’d see the price at 864p — a 70% rise from today’s 508p.

Investors would also bag five years of decent dividends. The trailing yield of 4.5% is above the FTSE 100’s 3.5%, although analysts see income growth being tempered by a five-year dividend CAGR of 3.2% — below the EPS CAGR — as dividend cover ticks up from 1.9 to 2. We’d see a total of 127p a share of dividends paid out over the period. Put another way, a £1,000 investment in BP today would deliver £250 in dividends alone.

Of course, none of this is guaranteed. However, history tells us that a re-rating of a recovering company can deliver super long-term returns for patient investors.

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G A Chester does not own any shares mentioned in this article.