How soon could the BP share price smash through 600p?

Now that the price of oil is storming up, can anything hold back BP plc (LON: BP) shares?

| 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.

I’ve been saying for some time that oil would stabilise back above $75 per barrel. And with the price ticking towards $80, I might finally have been proved right. I’m no great soothsayer, mind, as I’ve been saying this for years and it’s almost certainly something that would eventually come true.

But I’ve also held the conviction that prices above $75 were what it would take to start oil company shares moving upwards again, and that’s what seems to be happening. Shares in BP (LSE: BP) have gained 23% since the end of March, while the FTSE 100 is up 12%. And the gains have been across the board, with Royal Dutch Shell up 15% — and Premier Oil shares have shot up 70%!

At around 560p today, will it be long before BP shares break the 600p barrier? I don’t think so.

For one thing, BP has steadfastly stuck to paying its dividends during the oil price crisis, with chief executive Bob Dudley insisting that the business would recover, even though we were surely in for a few years of cheap oil.

BP’s consistent dividend provided a yield of 5.7% last year, though the same in cash terms yielded as much as 7.7% back in 2015. If you’d been prescient enough to see that oil prices would surely recover and that BP would continue to be a nicely profitable company, just think what a difference to your pension pot it could have made if you’d locked in a yield like that for the long term — and congratulations if you did just that.

Even though the share price has perked up lately, BP’s forecast dividend still stands at around 5%, and that’s still a good deal better than average. For the yield to come down to what I’d think of as sustainable long-term level of round 4%, we’d be looking at a share price of 750p. 

First-quarter results show that BP’s earnings are recovering nicely and as soon as we get back to dividend rises, I can see the share price soaring.

Picks and shovels

This brings me to an old “picks and shovels” favourite in the oil business, one that provides services to the oil explorers working at the sharp end.

I’m talking about Gulf Marine Services (LSE: GMS), whose share price has also ticked up of late. We’re looking at a 31% rise since a low point in early April, though there’s still some way to go before the 33% drop of the past 12 months can be clawed back.

Gulf Marine shares have struggled more than I anticipated as the period of cheap oil has lengthened, and a profit warning in August last year sent the price tumbling. But are we looking at good value now?

Analysts are forecasting a massive recovery in earnings. Admittedly it’s from a low base, as EPS collapsed to almost nothing in 2017. But if these predictions prove accurate, we’d be looking at a forward P/E multiple for 2019 of only seven — and maybe even the first signs of a returning dividend.

The big concern for me is debt, which stood at $398m at 30 April. That’s almost twice the company’s market capitalisation, and the big challenge in the next couple of years will be to get that down substantially. But if Gulf can remain afloat and achieve its expectations, we could be on to a decent recovery candidate.

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 owns shares of Premier Oil. 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

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »