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Why BP plc Could Be About To Fall Another 28%!

To say that shares in BP (LSE: BP) have endured a torrid time in recent times would be something of a colossal understatement. Investor appetite began to erode again once crude prices tanked last summer, and although the share price clawed back some ground in early 2015 market sentiment has soured once again — BP’s value has fallen by more than a quarter in just four months!

And while global stocks have rallied following the ‘Black Monday’ sell-off, BP’s failure to take off suggests that the downtrend is set to reign for some time yet. Indeed, I for one fully expect the oil play to sink further as it remains chronically overvalued — BP’s current share price of 345p leaves the business changing hands on a prospective P/E multiple of 14.3 times, thanks to expected earnings of 37.3 US cents per share.

However, I would consider a reading in line with the bargain benchmark of 10 times to be a wider reflection of the multitude of risks facing the business. A subsequent alteration to the share price would leave BP changing hands at just 242p per share, representing a massive 28% downgrade from current levels.

Earnings forecasts way too frothy

And it could be argued that even this price could be considered too heady. Projected earnings for this year would represent an 81% increase from the 20.55-cent-per-share figure reported in 2014, forecasts that are difficult to imagine given the deteriorating oil price. Indeed, BP reported in July that underlying replacement cost profits slipped to $1.3bn during April-June, down from $2.6bn in the prior quarter and slumping from $3.6bn in the corresponding 2014 period.

So the Brent benchmark’s drop below $43 per barrel this week, taking out January’s lows and marking the cheapest level for six-and-a-half years, comes as a fresh headache to BP’s investors. Brokers have been unsheathing their red pens again as a result, and the number crunchers at Citi even suggested that the black gold price could plummet as low as $20.

An upward breakout would appear to be some way off as Russian and North American output continues to rise — the number of US rigs in operation advanced for a fifth straight week, according to latest Baker Hughes data — and OPEC remains determined to grab market share by keeping the pumps switched on.

Capex cuts exacerbate revenues concerns

And the likelihood of a substantial earnings improvement at BP in the longer term is hard to envisage, too, with bulging inventories — thanks to insipid demand from China and other major consumers — likely to keep the market well supplied for years to come.

On top of this, BP’s drive to conserve cash prompted it to slash its capital expenditure targets once again last month, undermining still further the potential rewards from its asset base. The oil leviathan now plans to spend below $20bn in 2015, down from a figure of $22.9bn last year. And with its rolling divestment drive also chugging along, BP’s earnings outlook is likely to remain sticky regardless of whether oil prices pick up again or not.

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Royston Wild 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.