BP (LSE: BP) (NYSE: BP.US) shares have risen by 17% so far this year, comfortably outperforming the FTSE 100s 7% gain.
However, BP is still making up lost ground: the oil and gas firms share price is unchanged on one year ago, and is still 25% lower than it was before the Gulf of Mexico disaster.
Indeed, there are persistent rumours that BP could be targeted with a takeover bid and in this article, Ill explain why I believe BP could be a strong contrarian buy.
Bearish view
BPs chief executive has taken a notably more downbeat view on the outlook for oil prices than his opposite number at Royal Dutch Shell, Ben van Beurden.
Speaking earlier this week, Mr Dudley said that he thought the industry needs to prepare for lower for longer and said that prices could stay lower for several years.
In contrast, Shells estimate of impact on profits of its acquisition of BG is based on the assumption that oil will have returned to $90 per barrel by 2018.
Mr Dudley has kept expectations low, but is this part of a wider strategy aimed at deterring bidders?
The price could be right
Speaking at an energy conference in the US this week, Mr Dudley indicated that he wasnt keen on a bid, saying: Im not sure big is absolutely seen as beautiful.
Potential bidders such as Exxon Mobil and Chevron may disagree, however. At current share prices, BPs oil and gas reserves are valued at around $8.80 per barrel of oil equivalent (boe). Thats considerably less than Exxon Mobils reserves, which are valued at around $14/boe, based on my calculations.
BPs 2015 forecast P/E of 19 may seem a bit pricey, but oil and gas companies are bought and sold based on the value of their reserves, not their earnings. BPs reserves are unlikely to remain this cheap forever.
Whats preventing a bid?
BPs size means that only a handful of companies could consider a bid. But theres another problem: the most likely potential bidder, Exxon Mobil, might be reluctant to bid for BP while the firms Gulf of Mexico legal cases are still ongoing.
For a US firm, the combination of bad public relations and unknown future costs could be off-putting although as Ive written before, I suspect a settlement could be achieved, if necessary.
Buy BP today?
BP looks quite reasonably priced in todays market, although the Gulf of Mexico disaster is likely to continue to drag on the firms profits: I certainly wouldnt buy purely in the hope of a takeover bid.
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Roland Head owns shares of Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
