Here’s why BP plc shares could soon hit 600p

BP plc (LON: BP) shares last hit 600p in 2010. When will it happen again?

| 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.

The last time BP (LSE: BP) shares traded above the 600p level was back in March 2010, shortly before the Deepwater Horizon disaster. And when the eventual costs to BP of the explosion and resulting oil spill were finally becoming known, we were hit by the oil price crash, which sent the price of a barrel plunging to sub-$30 levels.

The BP share price is now back up to 461p, well ahead of the 309p low it hit almost exactly a year ago, so are we heading back above that elusive £6 level once again? I think we could be, and sooner than many might expect.

At the start of the oil price fall, BP chief Bob Dudley said he expected prices to remain down in the dumps for at least two-to-three years — and he was worth listening to, as things do seem to be panning out that way. The oil price looks reasonably stable at around $55 per barrel, and though we’re seeing some short-term spikes in oil inventories, world production is increasingly looking like it really is going to be cut back over the longer term.

Back to profit

BP’s full-year results, released on Tuesday, saw the FTSE 100 giant swinging back into profit, with a full-year headline profit (excluding Gulf of Mexico legacy costs) of $115m compared to a loss of $6.5bn in 2015. And, perhaps more indicative for the future, it reported an underlying replacement cost profit of $400m in the fourth quarter, with a full-year figure of $2.6bn.

That’s at an average price of $44 per barrel through the year, and we’re already 25% ahead of that today. BP’s total production for 2016 amounted to 3,268 thousand barrels of oil equivalent per day, which is 1,192,820 thousand barrels in total — or a little over 1.19bn barrels.

At $55, the same production this year would bring in an extra $13bn in revenue — and a further $10 per barrel would take that up by $25bn. And I think even rises like that would be very conservative estimates over the longer term — I’d expect to see oil certainly above $75 within five years.

BP is also turning away from the asset disposals that have dominated the last few years, and back towards new developments. In 2016, BP “launched six major project start-ups […] and made final investment decisions on a further five major projects,” in the words of Mr Dudley. He went on to say: “We start this year with considerable momentum – and a sense of disciplined ambition. We have laid the foundations for BP to be back to growth.

Handing out cash

And then we come to BP’s dividends. All through the crisis, the company has stuck to its insistence that it won’t cut its dividend, even though earnings weren’t even close to covering it — such was BP’s confidence that the cheap oil hit to cash flow was only going to be temporary.

BP made good on that, paying an unchanged 40 cents per share. That’s expected to be unchanged for the next two years, and would provide a yield of 6.8% — and predictions suggest earnings would be just enough to cover it.

Such a high yield, if it’s expected to be sustainable, also suggests to me that the shares are too cheap — even at 600p we’d still be looking at a yield of better than 5%.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended BP. 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

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

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 »