I think the BP (LSE: BP) share price can keep climbing, even after its recent performance. I’d even go so far as to say I think the stock is deeply undervalued. Today, I’m going to explain why.
BP share price outlook
In my view, investors have been avoiding BP recently. It’s easy to see why. The combination of volatile oil prices, uncertain economic outlook, and transition to green energy means it has been difficult for even the most risk-tolerant investor to own the shares.
Unfortunately, it doesn’t look as if these headwinds are going to disappear anytime soon. However, the company is doing its best to mitigate any negative impacts.
For example, BP has been slashing expenses across the business to push down its production costs. Thanks to these cost-cutting efforts, analysts believe the company has the potential to return as much as 10% of its market capitalisation in share repurchases and dividends with oil at $60 per barrel.
In addition, the same analysts believe the enterprise now has one of the most efficient oil production divisions in the sector. Moreover, BP is planning to cut its oil and gas output by 40% by 2030. It also aims to spend $5bn a year on low-carbon projects to manage its transition away from hydrocarbons.
Management wants 50GW of renewables such as wind, solar and hydropower in its portfolio by 2030, up from just 2.5GW today.
So, the company is navigating low oil prices and the green energy revolution. The only uncertainty left is the economic outlook. On this front, BP can’t really do much about the state of the global economy.
Nevertheless, it’s clear the outlook for the global economy is improving, which could positively impact the BP share price. When combined with the company’s low production costs and renewable energy plans, it looks to me as if the business has all the bases covered.
Risks and challenges
Of course, the company’s management cannot mitigate all risks and challenges facing the enterprise. For example, oil prices could fall substantially if there’s another significant economic contraction. BP may also face more pressure to invest additional funds in renewable energy projects.
Both of these headwinds could hurt the BP share price and possibly set back the company’s recovery. In the worst-case scenario, the group may have to reduce shareholder returns to free up more funding for capital projects.
Investors shouldn’t ignore these risks and challenges, but the company has managed similar headwinds over the past 12 months. While past performance should never be used as a guide to future potential, BP’s actions over the past year suggest the business is incredibly flexible.
And as the company pushes ahead with its transition plans, cost-cutting, cash generation and shareholder returns, I think the stock will attract more investor attention, pushing the BP share price higher. That’s why I’d buy the stock for my portfolio today.
