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BP plc Could Be Worth 550p!

Investor sentiment in BP (LSE: BP) (NYSE: BP.US) has been surprisingly strong since the turn of the year, with the company’s share price rising by 8% year-to-date. That comes after a tough 2014 that saw the value of BP decline by 16%, as the price of oil slumped and hurt investor sentiment as well as the firm’s profitability.

Looking ahead, though, BP could continue its recent rise and make gains of around 25% over the medium term, with the oil major having the potential to hit 550p a lot sooner than many investors realise.

Valuation

After such savage share price falls, BP now trades on a very appealing valuation. Certainly, the company’s profit levels are set to fall drastically this year but, even when this is taken into account, BP still seems to offer excellent value for money.

For example, with it being forecast to post earnings per share (EPS) of 34.9p in 2016, this equates to a forward price to earnings (P/E) ratio of 12.7 at its current share price of 443p.

This rating seems very reasonable on an absolute basis but, when compared to the FTSE 100’s P/E ratio of 15.9, it appears to offer even better value for money. In fact, if BP were to meet its forecasts for next year and also trade on the same P/E ratio as the FTSE 100, it would equate to a share price of 554p, which is over 25% higher than its current share price and would mean excellent capital gains in a relatively short space of time for investors in the company.

Potential Catalysts

Clearly, BP needs catalysts to improve investor sentiment and push its rating higher. One possible catalyst is an increase in the price of oil, which seems likely in the long run simply because it is not economically viable for a whole host of companies to produce at $50 per barrel. This means that there will inevitably be a reduction in supply and, when this occurs, the price of oil is likely to rise and leave the most efficient and sizeable companies (of which BP is one) in a relatively stronger position than they were previously, since they are likely to have a greater market share than before.

Another potential catalyst to push BP’s rating higher is an improvement in the outlook for the Russian economy. Clearly, further sanctions remain a distinct possibility but, should there be an improvement in the situation in Ukraine and in the Russian economy’s performance, it could lift BP’s performance too, since it has a near-20% stake in Russian operator, Rosneft.

In addition, further progress with regards to the Deepwater Horizon oil spill compensation payments is also likely to improve investor sentiment in BP. And, over the next couple of years, the chances of this taking place seem relatively likely, as they start to tail off and leave BP with a reduced cost base moving forward.

Looking Ahead

Undoubtedly, BP remains a stock that is likely to be volatile in the short term – especially if the oil price does resume its decline. However, over the next couple of years a share price of 550p looks very achievable, with investor sentiment having the scope to improve considerably should the aforementioned external factors show signs of change. As such, now could be a great time to buy BP – especially if you are a long term investor.

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Peter Stephens owns shares of BP. 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.