At a crossroads: why BP plc could slump or soar

BP plc (LON: BP) could be about to double or halve. Here’s why.

| 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 rise in the price of oil since its $28 per barrel low earlier this year has caught many investors by surprise. After all, there’s still a major demand/supply imbalance and it appears as though this situation will remain in place over the medium term.

This causes a real headache for investors in BP (LSE: BP) and other oil and gas plays, since investor sentiment has improved but could easily weaken moving forward.

On the one hand, the long-term prospects for oil remain sound. Demand from emerging markets in particular is expected to rise and while cleaner options will become available, fossil fuels are likely to remain a key part of the energy mix over the coming decades.

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

However, on the other hand, there’s a glut of oil and it wouldn’t be unreasonable to state that the price of oil could return towards its 2016 lows in the coming months. In such a situation, the profitability of oil companies such as BP (and their share prices) could tumble.

The key focus is therefore on a margin of safety. In other words, the price of oil is a known unknown, so it seems logical to seek out companies that are trading at a discount to their intrinsic value since they may offer less downside and greater upside potential.

Fair price?

On this front BP seems to have considerable appeal. It may trade on a price-to-earnings (P/E) ratio of almost 29 at the present time, but with its pre-tax profit forecast to rise from £2.9bn in the current year to as much as £6.8bn in 2017, its rating is due to fall to just over 13 next year. For an oil and gas major that has a well-diversified asset base and potential to build on its market share in the long run, this appears to be a very fair price to pay.

In addition, the market seems to be pricing-in a dividend cut which, based on current forecasts, isn’t set to take place. For example, BP currently has a yield of 7.4%, which is exceptionally high and would normally indicate that a dividend cut is round the corner. However, with BP’s dividends expected to be fully covered by profit next year, BP’s shareholder payouts may remain relatively resilient and robust over the medium term.

Certainly, BP’s dividends are highly dependent on the price of oil. If the price of black gold falls heavily then it seems likely that shareholder payouts will also fall. However, with such a high yield as well as a relatively appealing rating and upbeat growth forecasts, BP seems to have a sufficiently wide margin of safety to merit investment at the present time.

So, while BP could be set to slump or soar based on how the oil price moves in the coming months and years, from a risk/reward perspective it has considerable appeal for long-term investors.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

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.

Peter Stephens owns shares of BP. 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

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 growth stocks that could surge under the Donald Trump presidency

The new US President says he'll take the US economy to new heights, and there are plenty of companies that…

Read more »

Middle-aged black male working at home desk
Investing Articles

Here’s why I think Scottish Mortgage Investment Trust shares could keep beating the FTSE 100!

Scottish Mortgage Investment Trust shares have provided huge returns over the last decade. Can they keep outperforming the Footsie?

Read more »

Young woman holding up three fingers
Investing Articles

Just released: our 3 top income-focused stocks to buy in January [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Here’s the growth forecast for Nvidia shares through to 2026!

Demand for Nvidia shares has soared as investors eye up US growth stocks. Royston Wild looks at the chipmaker's earnings…

Read more »

a couple embrace in front of their new home
Investing Articles

Down 30% in 3 months, is the Taylor Wimpey share price too cheap for me to ignore?

Taylor Wimpey’s share price has plummeted since September and the stock now yields 8%. Should our writer buy the shares…

Read more »

Investing Articles

Is the S&P 500 heading for a correction in 2025?

This writer wonders whether the blue-chip US index is ready for a stumble, with one popular S&P 500 share up…

Read more »

Investing Articles

£15,000 invested in Tesco shares at the start of 2024 is now worth…

This writer takes a look at the performance of Tesco shares since the start of last year and considers whether…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

3 passive income ideas for Stocks & Shares ISA investors to consider!

Searching for ways to make a gigantic second income? Royston Wild reveals three ways that ISA investors could build long-term…

Read more »