New Value Analysis of BP Plc (LSE:BP)

Published by Studio 61 Wealth Management at 1st May 2017

New Value Analysis of BP Plc (LSE:BP)

A new value analysis of BP Plc (LSE:BP), a company listed on the London Stock exchange, has been added to our research pages here. BP Plc is a global oil company. BP Plc provides fuel for transportation, energy for heat and light, lubricants to keep engines moving and petrochemicals used to make everyday items.

The first data point that stands out when looking at BP from a value perspective is that the current price is 953 times earnings. Normally, a fair value for a large company would be between 15 and 20 times earnings. If BP currently trades at 953 times earnings it would suggest that value investors would not even think of looking at BP as an investment.

In order to consider BP as an investment a value investor must understand the role of depreciation on the earnings number. Also, for resource companies changes in the deemed value of mineral reserves impact the depreciation number. The depreciation statistic in the annual report for BP includes an amount for any change in value of mineral reserves. If mineral reserves decline the amount of depreciation increases. If deprecation increases the reported earnings decline.

In the last three years BP has reported increased depreciation in comparison with 2012 and earlier years. Part of the increase in deprecation is related to the revaluation of oil and gas reserves. The increase in depreciation has depressed reported earnings. Reported earnings for the last three years have been at historically low levels. Any increase in earnings from current low levels will reduce the price to earning ratio. If BP stops revaluing reserves downwards reported earnings will increase.

To find out if a value investor should consider an investment in BP Plc common stock click here to download the new analysis.