Can BP Finally Go Above Pre-Crisis Levels?

May.20.14 | About: BP p.l.c. (BP)

Summary

BP stock is back to $50 for the first time in over 3 years.

Significant risk in play with exposure to Russia, drops in production and lower earnings forecasts.

Positive price trend projection of 7% return for the next month with a supportive risk profile.

"I think the environmental impact of this disaster is likely to have been very, very modest." - Former BP CEO Tony Hayward, three weeks after the explosion

Coming out of the 2008 global economic crisis, BP had rebounded quite well and was up 43% year over year when it reached a share price of almost $60 (NYSE) on April 19th, 2010. The following day is well documented as the beginning of one of the worst environmental disasters in history, and changed the scale, focus and trajectory of the company forever. Over the next two months the company embarked on a PR nightmare that made the impact of the spill on the company even worse, and the stock dropped all the way back to $27 a share, a level not seen since 1996.

Although the stock recovered to just about $50 a share by the beginning of 2011, it has been in a trading range for the past two and a half years and has only just recently broken above the $50 mark for the first time in three years. Exxon Mobil (NYSE:XOM) is up about 37% during this time, and Chevron (NYSE:CVX) is up over 40%. Is the redefined BP ready to go higher and possibly get back to $60 a share?

The stock is up about 6% so far this year, which is solid given some of the headwinds. The company's exposure to Russia and potential sanctions from the ongoing conflict in Ukraine are significant, given their 20% stake in state owned Rosneft (OTC:RNFTF) and the fact that roughly 25-30% of their overall oil production comes from Russia. BP is also quite a bit smaller than in 2010, and continues to shed assets in favor of profitability and cash reserves. Overall production is down year over year once again, and earnings forecasts for the company have also been lowered for 2014.

On the bright side, the continued divestitures have led to significant cash reserves to satisfy remaining litigation and bills from the oil spill, and has helped spur continued growth in their dividend payout. The PE ratio is appealing compared to that of its peer group and the stock has recently been upgraded by RBC to Outperform. Are there any other factors to consider? Yes, the price trend.

The price trend factors all of the above information, and is one of the best gauges to understand where the stock is likely headed and to understand how similar companies have reacted to similar environments historically. Especially in this instance, where there is the possibility for significant volatility, having an objective input for the RANGE of likely outcomes is meaningful to the investor as part of their mosaic. To get this objective input for BP, I ran a few scenarios to see what the next one month looks like.

I took the current 3 months price trend in BP (NYSE) and found 54 similar historical instances of this trading pattern in Energy stocks, with the oldest instance being in 1984. In 83% of the instances, the stock was up in the next one month and the average return of all 54 is 7.0%.

Current 3 months price pattern for BP (NYSE)

Click to enlarge

(SOURCE: EidoSearch data 5/19/14)

Projection chart based on the 54 statistically similar instances of the current 3 month price trend in Energy Stocks historically. The chart below shows the average return for all 54 in the next 1 month of 7.0%. The orange bounds also display the range of likely outcomes, and are skewed to the positive side as well.

Click to enlarge

(SOURCE: EidoSearch data 5/19/14)

This chart better displays the 1 month forward return of each historical instance of the current price trend in BP. There is only historical example of a stock being down more than 10% in the next one month (Cameron Int'l Corp in 2001).

Click to enlarge

(SOURCE: EidoSearch data 5/19/14)

With significant geopolitical and fundamental factors at play, the price trend is solid and I would look for the rebound in BP to continue over the next one month.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.