Is the BP share price heading for 800p?

If the price of oil holds up, I think BP plc (LON: BP) could be going higher.

| 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.

Shares in BP (LSE: BP) look buoyant today, up around 4% as I write, on the release of the oil major’s third-quarter and nine-months results. The rise to around 556p looks set to continue a trend that has seen the stock lift more than 60% since February 2016, driven by operational progress and an almost doubling of the price of oil over the period.

If progress continues, and the oil price holds up, I reckon we could see BP blast to new highs, and 800p per share is well within the realms of possibility. Based on current City analysts’ forecasts, at 800p, the forward price-to-earnings ratio would be just over 16 for 2019, and the forward dividend yield would be a little under 4%. That’s not a wild valuation and it’s easy to imagine investor enthusiasm driving the share price to those levels, or for ever-improving earnings and operational progress causing the market to reset its expectations higher.

Strong trading

Today’s figures are good. Underlying replacement cost profit for the third quarter of 2018 came in at $3.8bn, which is more than double the figure in the equivalent period last year. BP said in trading report it’s “the highest quarterly result in more than five years,” and includes “significant earnings growth” from upstream operations, and from the firm’s involvement with Russian state oil company Rosneft.

One of the constants with BP has been its gargantuan cash generation, which saw it through its Gulf-of-Mexico oil spill challenges since 2010. Operating cash flow for the quarter, excluding oil-spill payments, hit $6.6bn. But even now, the company is still throwing millions towards settling its obligations in America, spending $0.5bn on oil-spill payments in the quarter. Nevertheless, the directors expressed their confidence in the outlook by pushing up the third-quarter dividend by 2.5%.

Operations are ticking along nicely, and the firm said in the report it had experienced its highest quarterly refining availability for 15 years, and BP-operated upstream plant reliability of 95%. Although I can’t help but remember how well things seemed to be going just before the Macondo blowout, which destroyed the Deepwater Horizon drilling rig, and took 11 lives, in 2010. I think it’s worth being aware of the hazards involved in BP’s business and the potential for something to derail any investment you make in the company.

Throwing off cash

However, things are going so well, and the firm is throwing off so much cash that it now plans to pay for its acquisition of assets from BHP Billiton with cash, rather than by raising equity. BP announced the $10.5bn acquisition in the summer and it consists of oil-producing assets onshore in the US. The deal should complete imminently and the firm now plans to plough some $5bn-$6bn of planned divestments from the acquired assets into reducing debt.

Based on the firm’s current performance and progress, the shares look attractive. The forward dividend yield runs close to 5.7% and the shares change hands at around 11 times forward earnings. However, if the oil price slides again, I think earnings will fall, taking the share price with it. As an alternative to the cyclical and execution risks inherent with BP, I’d also consider investing in an FTSE 100 index tracker fund. 

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.

Kevin Godbold 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

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

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

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »