Over the past year, the BP (LSE:BP) share price is up 27%. In fact, back at the end of March it hit the highest since 2010 when it popped above 600p. With the stock benefiting from several factors, I checked out the latest analyst forecasts on where it could go over the coming year.
Helping factors
The biggest driver so far this year has been the oil price. Tensions in the Middle East have pushed Brent crude sharply higher, boosting profits across the energy sector. BP has been one of the biggest beneficiaries, not only because it produces millions of barrels of oil and gas every day, but because its trading division has also capitalised on heightened market volatility. Q1 results showed net income of $3.2bn more than doubling year on year.
Management has also been working hard to improve the balance sheet. In a trading update from earlier in July, net debt was forecast to decrease to around $23bn from $25.3bn. This continues the trend over recent quarters, with the stronger finances helping to pay down borrowings.
Further potential gains
The current BP share price is 517p. The average 12 month analyst forecast is 596p. This reflects just over a 15% potential return. In terms of more details, the highest target is 700p from the team at RBC Capital Markets, with notable others including Barclays and Goldman Sachs at 650p each. In fact, of the 22 contributors I can access, only two have a target price below the current share price.
Of course, the projections shouldn’t be taken as gospel. However, it’s certainly an encouraging sign when the broad trend and consensus among City experts point to the stock rallying.
From my perspective, there are a couple of fundamental reasons why I think the business outlook could support the numbers mentioned above.
For one, BP has shifted its strategy back towards its traditional strengths. After years of trying to balance renewable energy investments with oil and gas production, the company has refocused on higher-return hydrocarbon projects and simplified its portfolio.
The other factor is my oil price outlook. I don’t see the conflict in the Middle East ending any time soon, and the 16% jump in Brent Crude oil prices last week from escalating tensions shows how quickly things can move. Therefore, higher-for-longer oil prices should enable BP to generate substantial free cash flow. That would support dividends, further debt reduction and potentially larger share buybacks, all of which could provide a boost for the share price.
Talking risks
The most obvious risk is that my view on the Middle East is wrong and a much-desired lasting peace deal means oil prices retreat. BP remains very sensitive to commodity prices, and a sharp move lower would almost certainly feed through into weaker profits.
Production is another area to watch. BP has already indicated that upstream output may soften because of maintenance and operational factors. So if we get a combination of lower output and lower prices, this wouldn’t be a great mix.
Ultimately, I agree with the experts about the target price for the coming year, so I am considering adding the stock to my portfolio. Investors who agree with my view could consider doing the same.
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Jon Smith does not hold any positions in the companies mentioned.
