BP (LSE:BP) shares have surged in the past month. According to Hargreaves Lansdown, the shares are up 33% in one month.
Many investors are more optimistic given the news about Covid-19 vaccine candidates. With potentially more effective vaccines if approved, I believe the world economy could return to normal faster. That could translate into more demand for BP’s products.
Given the rally however, is BP still a bargain? Here’s what I think.
Analyst earnings estimates
I think one way to decide whether BP shares are a bargain is to see how the company’s stock price relates to future estimated earnings.
In terms of estimates, analysts on average expect BP to earn around £1.08 per share next year. With its current stock price, BP would trade around 15 times 2021 earnings.
Given the earnings estimate, BP isn’t super cheap.
What oil prices do
If long-term oil prices rise substantially higher than estimates, however, I believe BP shares could be a bargain, all else being equal. I think this because, at its current stage, BP still depends on oil and gas products for most of its sales.
If oil prices rise a lot, I think BP’s earnings could rise and the company’s valuation would look more like a bargain to many investors.
In terms of oil prices, I don’t really know what’s going to happen in the short or long term. Oil prices depend on a variety of factors that I believe are very difficult to determine in the future such as economic growth rates, tech improvements, and geopolitical conditions.
Given that it’s difficult to predict when major tech breakthroughs occur, I think it’s difficult to determine future costs of electric vehicle (EVs) batteries, and hence long-term oil prices.
If battery costs fall a lot more than expected due to tech breakthroughs, I reckon long-term oil prices could be lower than what is currently expected, for example. I think this would be bad for BP’s oil and gas operations.
With this said, there is always an opportunity for outperformance too.
Former Goldman Sachs CEO, Lloyd Blankfein, said in September, “Everyone has decided that we’ll never have inflationary pressure again, oil prices will never go up again. I don’t think so.”
Going beyond petroleum
Given the uncertainty of oil prices, I think whether BP shares are a bargain depends on how well management executes on its green pivot in the future. If management does a substantially better than expected job generating profits from low carbon energies/technologies, I reckon the stock could be a bargain.
With valuations in the renewable sector being high right now, I also reckon there is an opportunity for BP stock to go higher if management correctly markets its green pivot to investors. Given BP’s competitive advantages and the huge size of the green energy sector in the future, I believe management will execute in the long run.
As a result, I think BP shares are a bargain at current prices and I’d buy and hold for the long term.
