Does BP plc Really Provide Good Value For Money?

In this article I am looking at whether BP’s (LSE: BP) (NYSE: BP.US) hefty risk profile outweighs prospective rewards.

Price to Earnings (P/E) Ratio


BP has struggled to punch sustained earnings growth in recent years, as volatility in the oil price and a squeeze on refining margins has whacked the firm’s bottom line. Still, it could be argued that these enduring problems across the oil industry are already factored into BP’s current share price.

Looking at current earnings forecasts the company currently changes hands on a P/E rating of 10.3 for 2014, just above the bargain benchmark of 10 times or below. And the oil giant dips into this terrain to 9.8 for next year.

Price to Earnings to Growth (PEG) Ratio

Still, City brokers expect the firm to experience more choppiness in the medium term, with a steep 35% earnings decline pencilled in for this year, followed by a 6% recovery in 2015.

This year’s predicted earnings fall fails to create a legitimate PEG rating, although 2015’s modest bounceback creates a reading of 1.6. Next year’s reading can hardly be considered catastrophic, even if it falls outside a reading of 1-or-below, which is widely considered exceptional value.

Market to Book Ratio

Once total liabilities are subtracted from total assets, BP’s book value comes in at £77.6bn. This translates to a book value of £4.20 per share, meaning the company’s market to book ratio registers at 1.2. This is marginally above the yardstick of 1 that is generally regarded as excellent bang for one’s buck.

Dividend Yield

BP has steadily got its progressive dividend policy back on track after the effect of the 2008/2009 financial crisis forced it to take the hatchet to shareholder payouts. And even though forecasts point to further earnings weakness this year, the fossil-fuel colossus is expected to raise the 2014 payout to 39.5 US cents from 37 cents last year. A further increase, to 41.6 cents, is chalked in for next year.

These projections create bumper yields of 4.7% and 4.9% for 2014 and 2015 correspondingly, crushing a forward average of 3.2% for the FTSE 100 and taking out a respective reading of 2.6% for the entire oil and gas producers sector.

Ongoing Worries Threaten To Crush Current Forecasts

Although at face value BP would appear to be a hugely-attractive pick for both growth and income hunters at current prices, I believe that the stock is not for the faint of heart. In my opinion the prospect of further heavy weakness in the black gold price, severe financial penalties emanating from the Deepwater Horizon legal battle, and rising exploration and production costs could prompt a worrying revision in current earnings and dividend estimates, crimping its image as a terrific value selection.

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Royston does not own shares in BP.