Has BP plc rallied too far too fast?
BP (LSE: BP) has been one of the FTSE 100's standout performers this year. Indeed, year-to-date shares in the oil giant have rallied by 33% excluding dividends, outperforming the wider FTSE 100 by 20%. Including dividends, shares in BP have produced a total return of 39%, which makes the group one of the best performing developed market blue chips in the world for 2016.
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A higher oil price has helped improve sentiment towards the company during the past few months. The price of Brent crude is up by around 22% since the beginning of the year, but this isn't the factor that is having the most significant impact on BP's shares.
Too far too fast?
BP's American depositary receipts (ADR), which are traded in New York in US dollars have only gained 14.1% year-to-date. The difference in the gains between BP's US and UK-listed shares shows that the majority of the capital gains on the UK side this year can be traced back to sterling's weakness.
As the value of the pound has fallen, all UK blue chips with overseas operations have seen their shares bid higher as earnings will receive a boost from the beneficial currency movements. BP is no exception. The company conducts most of its business in dollars and reports earnings in dollars as well. For the first half of 2016, the company reported an underlying replacement cost profit (the oil industry's preferred measure of profitability) of $1.25bn or 6.73 cents per ordinary share. Now assuming the company earns the same during the second half of 2016, BP is on track to report earnings per ordinary share of 13.5 cents for 2016.
At the beginning of the year, 13.5 US cents was worth 9.2p but at current exchange rates BP is set to earn 10.6p per share on a sterling basis. Of course, this is just a rough back of the envelope calculation, but it clearly shows how BP's sterling earnings per share have received a boost of 15% from currency fluctuations during the past nine months.
Hard to predict
Unfortunately, it's almost impossible to accurately predict what the value of any currency will be a year from now, which means that while shares in BP have benefitted from a weaker pound this year, the tailwind might not last for much longer. With this being the case, it does look as if shares in BP have rallied too far too fast this year and I wouldn't be surprised if they backtracked on gains over the next few months.
Still, the company remains attractive as an income investment for investors with a long-term investment horizon. Shares in BP currently support a dividend yield of 6.6%, and this payout appears to be safe for the time being. City analysts expect the group to earn 30.2p per share next year which will fully cover the dividend payout of 29.9p per share.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
