The BP share price is falling today but I’m still backing it to beat the FTSE 100

Harvey Jones says BP plc (LON: BP) is under pressure today but has what it takes to outperform the FTSE 100 (INDEXFTSE:UKX).

| 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.

It’s a bad day for BP (LSE: BP), with the share price down almost 4% after it reported a thumping 41% drop in third-quarter net profits from $3.8bn to $2.3bn. It’s been a pretty poor year all round for BP, with the share price down 3% in the last 12 months.

Weather worries

Today’s slump was down to lower prices, maintenance and weather impacts, as well as the impact of its divestments programme, which slapped the group with a non-cash, non-operating after-tax charge of $2.6 bn”.

It’s been a tough year for Big Oil. Fellow FTSE 100 behemoth Royal Dutch Shell is down 5% this year, and as climate change concerns grow, many are questioning whether the energy giants are going to be the dividend cash machines of the future.

Today’s update was bullishly headlined Continued strong operating cash flow and strategic delivery”, but investors understandably chose to focus on the group’s “significantly lower upstream earnings” rider, which tells a different story. 

The cash is still flowing

Mexico oil spill payments continue to inflict damage – $400m on a post-tax basis. Excluding those, operating cash flow stood at $6.5bn for the quarter, while downstream operations were expanding nicely in fast-growing Asian markets. BP pumped out 3.7m barrels of oil equivalent a day, up from 3.6m last year.

The £100bn group has also been divesting to simplify operations and reduce debt, and is nicely ahead of schedule, with transactions totalling $7.2bn at the end of the third quarter, and on course to reach $10bn by year-end.

Group CEO Bob Dudley also hailed strong operating cash flow and underlying earnings in a quarter that saw lower oil and gas prices and significant hurricane impacts”.

Double the fun

One disappointing quarter does not destroy the long-term investment case. Today’s $2.3bn profit figure may have been sharply down, but it was still better than the $1.7bn analysts had braced themselves to hear. My colleague Roland Head reckons BP could still double your money from a combination of share price growth and dividends.

Net debt remains a worry, as this stood at a hefty $46.5bn at 30 September, up from $38.5bn a year ago. I would like to see sustained progress in driving this down, to secure the future dividend stream.

Incoming chief executive Bernard Looney also needs to manage the transition towards biofuels, solar projects and electric car chargers, while making sure the oil and gas keeps flowing to provide shareholders with their dividends.

Today BP announced a payout of 10.25 cents for the quarter, and the stock is currently forecast to yield 6.2%, although with relatively thin cover of 1.2 times earnings. City analysts are predicting an even juicier 6.4% by 2021, with forecast cover of 1.33. Earnings per share are forecast to rise 4% this year and 14% in 2020.

BP currently trades at 14 times forward earnings, so it isn’t too pricey, although if fears of a global slowdown are proved correct the oil price could take another hit, and that will hurt from here. So there are challenges, but I would still buy BP. The oil age isn’t over just yet.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »