To say that 2014 has been a tough year for investors in BP (LSE: BP) (NYSE: BP.US) is a huge understatement. After all, the company has had to endure a collapsing oil price, a Russian financial crisis that affects the value of its 20% stake in Russian operator, Rosneft, as well as continuing challenges regarding the fallout of the Deepwater Horizon oil spill. It’s little wonder, therefore, that shares in BP have fallen by 16% since the turn of year.
However, have they fallen too much? And, is BP now worth buying ahead of a potential rise to £5, or is the next stop just 300p per share next year?
Discount Price
While the FTSE 100 trades on a price to earnings (P/E) ratio of 14.9, BP currently has a P/E ratio of just 9.6. Given the aforementioned problems that it faces, it is no major surprise for its rating to be lower than that of the wider index, but it could be argued that such a low valuation for such a high-quality company is difficult to justify.
And, while BP’s bottom line is due to fall next year, it is only forecast to be 8% lower than in the current year, which would be a relatively good result given the weakness in the oil price. So, in other words, it seems rather unlikely that BP’s valuation (and share price) will fall too much further. After all, a continued low oil price, further difficulties in Russia and more challenges regarding the Deepwater Horizon oil spill all seem to be expected by investors at the present time.
Changing Valuation
In order for BP’s shares to trade at 300p, their P/E ratio would need to fall to just 7 which, for such a large and well-diversified company such as BP (which has a very promising asset base), seems unlikely. On the other hand, a P/E ratio of just 11.7 would be needed in order for BP to hit 500p per share and, should there be a stabilisation in oil prices and the situations regarding Russia and the Deepwater Horizon oil spill, this could be a realistic target for shares in BP over the medium term.
Looking Ahead
BP also offers a dividend yield of 6.1%. While profits are set to fall next year by 8% (as mentioned), dividends are unlikely to be affected since they are covered 1.7 times by profit. As such, a relatively high yield could provide support to BP’s share price during the course of 2015 and attract investors looking for a high yield.
So, while there are likely to be further lumps and bumps ahead for BP, the company remains a great long-term investment. Although the current share price may not be the bottom, BP appears to be well worth 500p and, during the course of next year, its shares could move significantly towards that level.