Why BP plc Could See Its Share Price Fall A Further 30%+!

Royston Wild explains why BP plc (LON: BP) could be in for extra share price pain.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Despite the washout still being felt across global stock and commodity markets, fossil fuel giant BP’s (LSE: BP) share price has held up remarkably well since the first bongs of New Year’s Day prompted investors to hit the ‘eject’ button.

BP has seen its share price fall just 0.5% in the year-to-date, much better than the 6% decline seen across the broader FTSE 100 index. The loss is hardly cause for fanfare, naturally, but is a remarkable performance in my opinion given the chronic downturn in crude prices.

Crude set to collapse?

Despite a healthy uptick in recent days, the Brent benchmark is still trading 17% lower from levels seen at the end of December, at $30.80 per barrel. And prices even touched their cheapest since 2003 around $27.20 last week.

And recent bumps higher are likely to prove nothing but a short-term phenomenon, in my opinion, as supply/demand dynamics in the oil sector continue to worsen.

Iran is poised to flood the market with an additional 500,000 barrels per day thanks to recent sanction removals, while fellow OPEC members Iraq and Libya are also tipped to increase production in the coming months. And Russian and US production levels are also steadily rising.

With US oil inventories rising to a fresh modern record of 486.5m barrels last week, according to EIA data, and the relentless stream of bearish Chinese data showing no signs of letting up, predictions of $10 oil from industry experts are becoming more popular by the day.

An expensive stock selection

Against this backcloth I see little but fresh pressure emerging for BP’s share price. Sure, values may have defied gravity since the turn of the year, but a worsening crude price over the past year has seen its stock value erode by a shocking 27% since last May’s highs of 484.15p per share.

Indeed, BP certainly seems chronically overvalued based on conventional earnings metrics. The City expects the oil giant to record a 6% earnings improvement in 2016, a reading that produces a P/E rating of 15.2 times.

I believe that such a prediction will prove disastrously wide of the mark as oil revenues tank — BP saw underlying replacement cost profits slump to $1.8bn in July-September from $3bn a year earlier.

But even if current projections prove to be correct, I believe current share prices still fail to reflect the chronic long-term risks facing the business and reckon a P/E rating of 10 times would be a fairer reflection of BP’s travails.

A subsequent rerating would leave the London firm dealing on a P/E rating of 233p per share, representing a whopping 34% discount from current levels around 355p.

Don’t bank on bumper payouts

Without doubt BP’s gigantic dividend yields are helping to keep the share price afloat in the current climate. The abacus bashers still expect BP to continue generating market-beating dividend yields despite rising pressure on the firm’s balance sheet — net debt galloped to $25.6bn as of September, up from $22.4bn a year earlier.

It’s true that estimated dividends of 36.8 US cents per share for both 2015 and 2016 would represent a downgrade from a 39.5 cent reward last year. But such figures still yield an impressive 7.2%.

And as profits look set to continue tanking, and further job cuts in the North Sea underline BP’s desperate scramble to conserve cash, I believe dividend hunters could end up severely disappointed.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »