Why BP plc Is Undervalued


There’s big potential for BP‘s (LSE: BP) (NYSE: BP.US) stock to rise in the future. This is despite BP having already agreed huge payouts as a result of the Gulf of Mexico oil disaster in 2010 totalling $9.6 billion.

A recent federal court ruling was another blow as BP lost an appeal to cancel the terms of its multi-billion dollar settlement. BP argued that the payouts were too generous and often people were being paid handsomely for false claims.

This is a huge financial burden resulting in uncertainty around the company’s potential for losses. Such uncertainty has led to it being undervalued compared to competitors such as Royal Dutch Shell.

The legal proceedings rumble on, with BP’s lawyers arguing that the court erred in its ruling to uphold claims, and the company is seeking a rehearing. Throughout this period we can expect BP to trade at a discount.

A growing market for oil

Over the next two years oil consumption is expected to continue to grow. In 2013 consumption grew by 1.2 million barrels per day, and we can expect these levels to steadily increase, with demand exceeding 90 million barrels daily in 2015.

BP is in a prime position to take advantage of this as exploration and production is expected to be vigorous. Its leadership position in technology enables it to find the best locations and retrieve reserves previously thought impossible to recover.

The company is looking towards new opportunities such as commissioning a new platform within the Chirag Oil Project by the end of 2014. In total the site — located in the Caspian Sea — should produce 300 million barrels of oil.

This is together with other discoveries, such as a momentous find at its Gila prospect in the Gulf of Mexico, and the addition of a new ultra-deepwater drillship, the West Auriga.

Pick up a pay packet

Presently priced at 476p per share, BP trades on a P/E of 6. At present the market is yet to get fully clued up, but over time once the compensation issues are ironed over, BP’s valuation should recover. There are rewards to reap here.

All the while you’ll be picking up an income of almost 5%. If production ramps up as analysts expect, and over the medium term we see earnings grow, then dividends should rise steadily.

That’s not an entirely safe bet as we could still see more heavy legal penalties crimping earnings, with BP struggling to match previous dividend growth rates. The potential for reward is there, however, as BP outperforms its leading competitors all the while being underpriced.

We could yet see BP shares take off.

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> Mark does not own shares in BP.