BP (LSE: BP) shares look cheap after recent declines, compared to their trading history. What’s more, following the recent performance of the price of oil, I think the firm is now in a strong position to stage a recovery in the years ahead. And that’s why I’m looking at buying the company for my portfolio.
The price of oil has recovered steadily over the past few months. A barrel of Brent crude oil is now changing hands at around $43, more than double its March low. I believe if the price of the black gold remains around this level, BP’s profits could jump next year. That could lead to a surge of positive investor sentiment, potentially pushing up the stock price.
BP shares falling
It’s easy to understand why investors have been selling BP shares this year. The price of oil plunged in March, and it’s been slow to recover. At the same time, the transition away from dirty hydrocarbon fuels has accelerated.
While the world is still consuming around 100m barrels of oil a day, the world is changing rapidly. Many investors, including this one, can see renewable energy is the future. Companies like BP that don’t recognise this, risk being left behind.
Changing company
The good news is, BP is changing. The company has promised to invest more in renewable energy. It aims to boost its “low-carbon investment” to $5bn annually by 2030. Management is targeting 50GW of renewable generation by this date. In 2019, the group’s renewables production was just 2.5GW.
The company’s existing oil and gas projects should provide the capital required to hit this target. As noted above, the price of oil has risen significantly over the past few months. This helped the business eke out a tiny profit for the third quarter of the year — a substantial improvement on the multi-billion dollar loss reported for the first half.
The organisation is planning additional cost cuts over the next few months to reduce its costs of production further. It’s currently around $42 per barrel. That suggests to me the company is only just profitable at current levels, which is positive for BP shares, in my view.
Discount
However, despite the group’s stronger financial position and renewable plans, BP shares are trading at a 30% discount to their March low. That’s why I’ve decided to take a closer look at the stock.
I think this is unwarranted. The company was in a much more uncertain position at the beginning of the year. For example, no one knew how long the coronavirus pandemic would last. Now the world seems to be looking forward to getting back to normal and a vaccine should be available in the first half of 2021. At the same time, oil demand hasn’t fallen as much as expected, and BP has been able to offset losses with cost-cutting.
As such, I think BP shares look undervalued at 240p. The firm has made tremendous progress over the past six months, and I’m excited about its future renewable energy plans. That’s why I’m considering adding the stock to my portfolio today.
