Is BP plc Due a Re-Rating?

bpBP (LSE: BP) is one of the six global oil ‘supermajors’, with a market cap of £79bn and a notable 5.3% dividend yield.

Despite consistently posting revenues of close to £400bn a year, in recent times its share price has played the part of ‘story stock’ rather than FTSE 100 stalwart.

Trading on a PER of 8.8x, the company finds itself trading at a considerable discount to the FTSE 100 average of 12.8x. Not only does it stand at a significant discount to the FTSE average, it also trades at a slight discount to peers and to its own book value. Bearing these factors in mind, we discuss the potential for an upwards re-rating of BP shares in the short term.

The Bad – Deepwater Horizon and Rosneft…

BP’s woes have been well documented in recent years. The oil major’s recent depressed share price and underperformance relative to the market can, unsurprisingly, be traced back to the 2010 Macondo oil spill. Since 2010, BP shares have averaged as much as 27% below their pre-Deepwater Horizon peak of 650p.

The company is in the middle of a large and messy legal saga, attempting to hammer out the total costs and compensation of the oil spill. Even though BP has set aside more than $42bn for legal costs, this figure could continue to climb in years to come. The company should have enough firepower to absorb ongoing litigation costs without compromising its balance sheet.

For those minded to disagree, we would point to BP’s almost unrivalled billions in annual revenue and profit figures.

However, BP has still had to restructure its business in light of its changed situation in the US. It has had to sell many of its non-core assets, including its natural gas operations in Canada and investments across the US, the UK and other countries.

Another cloud on the horizon is BP’s 19.75% stake in Russia-based Rosneft. Management see the stake as an essential cog in its long-term success plan, and so any investors hoping that this asset might get sold off will be disappointed. More likely, BP and Rosneft will batten down the hatches and wait for the geopolitical turmoil to blow over.  

The Re-Rating?

As mentioned above, BP is still a massive, global oil supermajor. In 2013, it registered $21bn of operating cash flow and $5.4bn in dividends. In beating the company with well-known sticks such as the oil spill and its Russian connections, investors often ignore BP’s world-class assets.

As of 2013, BP produces 3.2 million barrels of oil per day, has a total proven reserve of 17.9 billion barrels, and owns 17,800 service stations. Although its largest division is BP America, operations span 80 countries and include considerable stakes in foreign giants as Rosneft. The company is also involved in exploring renewable energy sources: specifically, it has worked in solar power, biofuels, and wind power.


On balance, investors appear to focus more on the well-known negatives of the BP investment case than its under-appreciated positives. As a long-term investment, BP looks a buy with a strong and well-protected dividend – but don’t be surprised by short and mid-term turbulence due to geopolitics and public sentiment.

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Jack Brumby has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.