Time To Bet On A 20% Rally For BP plc

It could be a great time to add BP to your portfolio, if you haven’t done so already in recent times. You could pocket a 10% pre-tax return by the end of June.

The oil giant’s long-term prospects are appealing, too, based on fundamentals, trading multiples and macroeconomic trends. 

 Clean Water Act

BP will face Clean Water Act fines for its Gulf of Mexico oil spill of up to $13.7 billion, less than a maximum of $17.6 billion it could have been fined,” Reuters reported late Thursday. That wasn’t entirely unexpected, to me at least.

So, Friday turned out to be a very nice day of trading for BP shareholders, with the stock up more than 5%. The upside could be greater, though — the shares should easily trade higher than 500p, based on BP’s equity fair value, for an implied upside of more than 25% from their current level.

Is it time to buy and add up to 5% of BP stock to a diversified portfolio?

I think so. 

Time To Build Up 

Last week was a busy one for oil majors, oil investors and suppliers.

Good news for BP shareholders on Thursday came on the day the US reported weak economic data, while OPEC said it had boosted production in December, which inevitably sent oil prices sharply down. In the UK, a review aimed at identifying risks to oil production was launched following the collapse in oil prices, it also emerged on Thursday, when BP and ConocoPhillips stated their intention to cut hundreds of jobs in the North Sea.

Across the Atlantic, oil services and equipment provider Schlumberger also announced on Thursday it would get rid of 9,000 workers — just less than 10% of its global workforce.

Surely, the bottom for the equity valuations of most oil companies must be around the corner — and what a better opportunity than BP to add exposure to the oil sector right now?

Oil Prices And Value 

Uncertainty related to the outcome of the oil spill in Mexico still weighs significantly on BP’s valuation, but latest news is encouraging, and supports the investment case. 

Brent crude oil rose more than $2 a barrel on Friday after the International Energy Agency (IEA) said oil prices could fall further.  But they may recover, the IEA added, as production diminishes in some parts of the world, such as North America.

I reckon a 50% rise in Brent crude oil to around $75 a barrel shouldn’t be ruled out in the next 12 months. And even if oil prices don’t rise as fast as I expect, I wouldn’t worry: BP remains a compelling investment, particularly if it properly manages its vast portfolio of assets.

As I argued in late November, when BP traded at 448p (some 8% higher than its current level of 414p), BP is a long-term investment that could yield market-beating returns. It has changed a lot in the last two decades, and a smaller asset base — which, along with cost-cutting, is top priority for management — would further help it deliver plenty of value to shareholders. 

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Alessandro Pasetti 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.