The BP (LSE: BP) share price has increased in value by around 25% since the end of October. I don’t think this is a one-off performance.
Over the past few weeks, the world seems to have turned a corner in the battle against coronavirus. The fight isn’t over just yet. But light has started to appear at the end of the tunnel. What’s more, oil demand hasn’t fallen as much as some analysts were expecting. And economic activity is more robust than initial projections suggested.
These developments suggest to me that the BP share price could continue to increase in the weeks and months ahead.
BP share price on offer
Despite the recent performance of shares in the oil major, they continued to look undervalued from a long-term perspective.
Following significant losses in the first half of the year, BP is expected to report an overall loss for 2020. However, forecasts also suggest the group is going to stage a rapid recovery next year. Analysts have pencilled in an overall net profit of $5.1bn for 2021. That’s higher than 2019’s figure of $4bn.
Of course, these are just forecasts. Many things could go wrong between now and 2021, which could force analysts to revisit their projects.
Nevertheless, these figures clearly illustrate to me the potential the company has. When coronavirus is in the rearview mirror, profits could jump. That would likely lead to improved investor sentiment towards the BP share price.
Based on the current projections for 2021, the stock is trading at a forward price-to-earnings (P/E) ratio of just 13.
Income investment
It could take 12-24 months for investors to return to the BP share price. However, in the meantime, existing investors will be paid to wait. Current forecasts have the stock yielding around 6% for 2021. That’s not a bad return considering the current interest rate environment.
Moreover, this figure suggests that even if the stock goes nowhere over the next two years, I’ll earn a 12% return just buying and holding the shares. There are only a handful of other investments that I think offer the same kind of risk-return opportunity as this.
Therefore, after considering all of the above, I’m a cautious buyer of the BP share price. The company’s going to face further headwinds in the near term, that’s unavoidable. But it’s becoming increasingly apparent that we are past the worst of the crisis.
This suggests that while BP may face further uncertainty, management should be able to steer the business through without too much more pain for investors.
At the same time, analyst growth projects tell me the changes made to the group’s operating structure and cost base over the past 12 months put it in a strong position to ride the recovery over the next few years.
I’d be willing to own the stock in my portfolio to profit from these trends.