Are BP plc Shares Heading To Their Post-Macondo Low Of 305p?

Could BP (LSE: BP) (NYSE: BP.US) shares return to the 18-year low of 305p they hit in 2010, in the wake of the Gulf of Mexico disaster?

At the start of 2014, it might have seemed an unlikely idea… but since then, BP shares have fallen by 25%, from almost 500p, to just 368p, at the time of writing.

During the same period, shares in Royal Dutch Shell have fallen by just 12%, so the events of 2010 are clearly still having an effect on investor sentiment towards BP, despite its generous programme of share buybacks and dividend growth.

You’re not being realistic

I admit that BP shares would need to fall by another 16% to reach 305p again, but this isn’t necessarily as unlikely as it sounds.

Firstly, a share price of 305p would equate to a 2015 forecast P/E of 8.1, using the latest consensus forecasts for BP earnings. This isn’t too unreasonable, given that these earnings are likely to be adjusted downwards again at some point in the next six months.

Secondly, BP faces other headwinds: 2015 should be the year when BP learns the size of the fine it will be required to pay under the US Clean Water Act.

This fine could be anything from around $5bn to $20bn, but following this year’s ruling that BP was grossly negligent in allowing the oil spill to happen, a fine towards the upper end of this range appears to be more likely than I’d previously thought.

Finally, investors are nervous about energy markets: oil demand growth is slowing, and BP could be forced to write down the value of some of its assets in the light of lower oil prices.

BP’s prospective yield is now over 6%, suggesting markets are pricing in the possibility of a cut to the firm’s very generous payout.

Is it time to buy BP?

At BP’s current share price of around 370p, I believe it looks reasonably good value and would be a sensible long-term buy.

However, I don’t think we’ve quite hit the bottom yet: contrarian investors who are willing to wait a little longer might be rewarded with a further drop in BP’s share price that could make the oil major a screaming buy.

However, there’s no doubt that the falling price of oil is going to make life tougher for BP.