Is BP plc Becoming A Contrarian Buy?

BP (LSE: BP) (NYSE: BP.US) shares have risen by 17% so far this year, comfortably outperforming the FTSE 100‘s 7% gain.

However, BP is still making up lost ground: the oil and gas firm’s share price is unchanged on one year ago, and is still 25% lower than it was before the Gulf of Mexico disaster.

Indeed, there are persistent rumours that BP could be targeted with a takeover bid — and in this article, I’ll explain why I believe BP could be a strong contrarian buy.

Bearish view

BP’s chief executive has taken a notably more downbeat view on the outlook for oil prices than his opposite number at Royal Dutch Shell, Ben van Beurden.

Speaking earlier this week, Mr Dudley said that he thought the industry “needs to prepare for lower for longer” and said that prices could stay lower for several years.

In contrast, Shell’s estimate of impact on profits of its acquisition of BG is based on the assumption that oil will have returned to $90 per barrel by 2018.

Mr Dudley has kept expectations low, but is this part of a wider strategy aimed at deterring bidders?

The price could be right

Speaking at an energy conference in the US this week, Mr Dudley indicated that he wasn’t keen on a bid, saying: “I’m not sure big is absolutely seen as beautiful”.

Potential bidders such as Exxon Mobil and Chevron may disagree, however. At current share prices, BP’s oil and gas reserves are valued at around $8.80 per barrel of oil equivalent (boe). That’s considerably less than Exxon Mobil’s reserves, which are valued at around $14/boe, based on my calculations.

BP’s 2015 forecast P/E of 19 may seem a bit pricey, but oil and gas companies are bought and sold based on the value of their reserves, not their earnings. BP’s reserves are unlikely to remain this cheap forever.

What’s preventing a bid?

BP’s size means that only a handful of companies could consider a bid. But there’s another problem: the most likely potential bidder, Exxon Mobil, might be reluctant to bid for BP while the firm’s Gulf of Mexico legal cases are still ongoing.

For a US firm, the combination of bad public relations and unknown future costs could be off-putting — although as I’ve written before, I suspect a settlement could be achieved, if necessary.

Buy BP today?

BP looks quite reasonably priced in today’s market, although the Gulf of Mexico disaster is likely to continue to drag on the firm’s profits: I certainly wouldn’t buy purely in the hope of a takeover bid.

If you are looking for a reliable income with the potential for capital gains, I'd urge you to take a look at the five stocks hand-picked by the Motley Fool's analysts for "5 Shares To Retire On".

The companies concerned are all global names, and the Fool's experts believe they could perform strongly over the coming years.

To judge for yourself, download your FREE, no-obligation report today: for immediate access, just click here now.

Roland Head owns shares of Royal Dutch Shell. 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.