The Motley Fool

Why BP plc Might Be Worth 30% More!

With BP’s (LSE: BP) share price being only 10% higher than it was during its lowest point in 2010 when the Deepwater Horizon disaster occurred, it’s clear that the company’s investors are enduring an exceptionally hard time. Looking ahead, the oil price could fall further and cause profitability across the oil and gas sector to come under even greater pressure.

However, much of the bad news could now be priced-in. That’s not to say BP’s share price won’t fall in the short run, but rather that for long-term investors it appears to offer significant upside potential, with a rise of 30% being highly achievable.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The dividend question

That figure of 30% is derived from BP’s dividend. Throughout the oil crisis BP has repeatedly stated that shareholder payouts remain a priority and that it remains financially viable with the current level of dividends being paid. This is good news for investors, but with BP forecast to pay out 25.8p in dividends per share this year, shareholder payouts are expected to exceed earnings per share. The latter is anticipated to be 23.3p, which leaves BP with a 2.5p per share shortfall.

As a result, it seems relatively likely that BP will reduce its dividend. A sensible figure could be 75% of profit being paid out as a dividend, given its desire to pay a generous dividend but also taking into account its need to reinvest in its asset base. This would allow it to achieve both aims and would leave BP’s shares trading on a yield of 5.2%.

That figure is considerably higher than the wider market’s yield, which is currently just over 4%. Were BP’s shares to trade on a yield of 4% and pay out 75% of 2016’s forecast profit as a dividend, it would lead to a share price of 437p, which is around 30% higher than the current level.

Clearly, the above assumptions rely on a degree of stability regarding the oil price. Although oil could fall, rise or stay the same in the coming months, the reality is that in the long run demand for oil is likely to rise and supply will probably fall. That’s because demand from emerging economies for energy is forecast to steadily increase over the coming years as industrialisation continues, while oil at its current level remains uneconomic for some producers and so gradually supply could begin to tail off.

As such, BP could see its profitability improving in the coming years – especially since investment across the oil and gas industry has been cut and this could help to reduce supply in the long run too. And with the company’s shares trading at what appears to be a very appealing valuation, there appears to be scope for 30%-plus gains as well as a very generous income return over the medium-to-long run.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.