With the easing of the oil price crisis, BP (LON: BP) shares have been picking up quite nicely over the past 12 months, gaining 28% to reach near 570p. But as the price of a barrel has stabilised at around the $75 level over the past few months, so has the BP share price been flat.
And looking back over 10 years, BP is still lagging, down 7% while the FTSE 100 has gained a still-not-impressive 37%. Of course, dividends of around 4%-6% per year have helped a great deal, and an investment in BP a decade ago would still have you in profit — during one of the company’s worst spells in decades.
For me that underlines the long-term quality of BP, but it’s still disappointing to see the shares trading for less than 600p, a level they haven’t seen since 2010.
Looking at the fundamentals for the shares, they definitely appear to be undervalued. We’re looking at forecasts for a storming return to EPS growth which would drop the forward P/E as low as 12.5 by 2019, which I reckon would be decent value for a stock offering a dividend yield close to the FTSE 100 average. But with BP’s yield forecast approaching 5.5%, surely it deserves a better rating?
Oversupply
The problem, though, is renewed fears of a worldwide glut of the black stuff resulting in another price fall. According to the International Energy Agency, global supplies rose by 370,000 barrels per day in June, with OPEC production climbing to 31.87m barrels per day as countries adjusted to the Vienna Agreement.
On top of that, production from non-OPEC countries is predicted to grow by 2m barrels per day this year and by 1.8m next year, largely as US companies are expected to pump up their volumes.
And though demand has been pushing up too, it’s not keeping up with supply and world stocks are also on the up.
Predictions for oil prices for the rest of the year and for 2019 are not exactly helping — Standard Chartered has suggested pretty much a maintenance of current levels, while Barclays suggests prices will drop in the second half of this year with oversupply extending into 2019.
What next?
So what should BP do to get its share price moving again and what should private investors do?
To answer the first question, nothing. BP should be focusing on its bottom-line performance in terms of earnings, dividends and balance sheet. If it had excess capital to return to shareholders and the board reckoned the share price was low enough, then a share buyback might make some sense.
But shareholders are getting plenty by way of those tasty dividends, and BP has other ideas for expenditure — having recently announced the acquisition of assets from BHP Billiton for a total cash consideration of $10.5bn. It’s nice to see BP buying assets rather than selling them off to raise cash as it was forced to do in the aftermath of the Deepwater Horizon disaster.
As for investors, just sit back, forget the share price, and keep taking the annual 5%+ in cash — and ideally, reinvest it in more shares.
Wherever oil prices go in the near future, I see the the $65-$75 range as being a stable target over the longer term. And at those prices, I can see 600p BP shares before too long.