Are BP Profits About to Soar?

LONDON -- City profit forecasts for BP have been increased seven times in the last month. This has been met with just a 1.8% increase in the company's share price. Though the shares today trade close to a high for the year, they remain significantly below the level that they traded at before the Gulf of Mexico disaster.

Why the rises?
Markets were cheered earlier this week when BP announced first-quarter profits. Although profit was down almost 10% on the prior period in 2012, earnings were 10% ahead of what had been achieved in the preceding three months.

This strong result will have inspired confidence in future profits at BP.

The company also announced a $0.09 per share dividend. This was equal to the payout for the final quarter of 2012 but ahead of the $0.08 per share declared for the first three months of 2012. An increased dividend is often taken as a sign of improved confidence among managers.

The outlook
Commodity prices have been falling recently. In the last three months, the price of Brent crude oil is down 13%. As the cost of extracting a barrel of oil is typically fixed, cheaper oil means less profit for BP.

According to my data, analysts are currently forecasting $0.82 of earnings per share from BP this year. This is then expected to reach $0.93 in 2014.

The total dividend payment for 2013 is expected to be $0.36 for 2013, rising 7.5% to $0.39 next year.

These forecasts put the shares on a 2013 price-to-earnings (P/E) ratio of just 8.9 times forecast earnings. The expected growth pushes this down to 7.8 times for 2014. The average FTSE 100 company trades on a P/E of 13.4. That makes BP cheap.

The expected dividend yield from BP is 4.9% this year and 5.3% the next. Again, this is well ahead of most FTSE 100 companies who are expected to pay 3.2% on average.

My verdict
BP is very attractive on current forecasts. However, declining commodity prices will hurt profitability. Just as there are concerns over the possibility of fines from a court case relating to BP's involvement in the Macondo disaster, BP's future in Russia is now much clearer and a large share buyback program is under way. All in all, I expect an investment at this level would be rewarding but bigger gains could be found elsewhere.

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