The last time BP (LSE: BP) traded at 500p was in July 2014. Since then, its shares have fallen to their lowest point since news of the Deepwater Horizon oil spillage broke in 2010, with them being as low as 310p earlier this year.
Looking ahead, BP’s financial performance and share price performance are both clearly heavily dependent on the price of oil. If oil were to fall significantly then there’s a realistic chance that BP’s share price could slump to 250p in the short run, which would represent a decline of 30%. While oil has increased in price by around 60% since its $28 per barrel lows earlier in the year, it’s still susceptible to wild swings in price so further increases in production and/or falling demand could spark another decline in its price.
However, BP’s long-term potential remains very high. Certainly, in the short run it offers substantial downside risk, but in the long run the outlook for the price of oil is highly encouraging. That’s because demand from emerging markets for oil is likely to increase at a brisk pace in the long run and while sources of cleaner energy will become more prevalent, fossil fuels are still forecast to be an important part of the energy mix.
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Furthermore, with the oil price being below $50, it’s uneconomic for a number of producers to operate and so there’s a good chance that market forces will cause a drop-off in production in the coming years. While companies such as BP can cut costs and reduce their expenditure, this may not be possible for smaller, less financially stable companies. And with exploration spend being down, there could be further pressure on supply moving forward.
Value for money
With BP trading on a forward price-to-earnings (P/E) ratio of 13.5, it seems to offer good value for money at the present time. This view is backed up by BP’s yield, which currently stands at 7.6% and while it’s due to account for all of profit next year, BP has the financial strength to live with a high payout ratio in the short-to-medium term. And with profitability set to rise next year, BP’s dividends and financial outlook look to be on the cusp of a brighter future.
Clearly, as with any resources stock, BP’s share price performance is likely to be more volatile than is the case for many of its index peers. This makes buying it for the short term a very risky and arguably unwise move, since a share price of 250p can’t be ruled out if the price of oil falls. However, with the long-term future of the oil industry being upbeat and BP having the financial strength to emerge from the current crisis in a stronger position relative to its peers, it seems to be in an excellent position.
And while 500p is likely to require a sustained rise in the price of oil, BP’s yield and valuation indicate that now is a good time to buy and hold it in 2016 and beyond.
