Is it too late to buy BP shares?

Rupert Hargreaves explains why he thinks BP shares continue to look undervalued considering the company’s growth potential.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Woman using laptop and working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BP (LSE: BP) shares are up around 22% over the past six months. As the price of oil has surged to a multi-year high, investors have been buying into the stock expecting further profit growth. Over the past six months, shares in the oil and gas company have outperformed the wider FTSE 100 index by 24%.

Over the past year, the FTSE 100 has returned 4% excluding dividends, compared to 15% for BP shares. 

However, despite this impressive performance, I think the stock does not yet reflect the company’s growth potential over the next couple of years. As such, I believe there is still time to buy the investment for my portfolio

The outlook for BP shares

Shares in the oil giant have come under pressure recently due to its exposure to Russia.

The group did have a significant stake in one of the country’s largest oil producers, Rosneft. Management has declared that the company will exit this stake. The cost of doing so has been pegged at $25bn.

Understandably, some investors have been put off by this loss. The stock dropped around 10% in the days after the firm announced the divestment.

BP could not really hold on to the position considering the current geopolitical situation. It really had to exit the holding. The good news for investors is that this $25bn figure is unlikely to have a significant impact on the company’s operations. Foreign exchange losses will make up around half of the loss. The rest will be an adjustment to the value of the holding. The loss will be a balance sheet adjustment, and it will have a minimal impact on the corporation’s earnings. 

That said, for 2021, the Rosneft stake paid BP $1bn in dividends. Compared to the company’s overall net profit of $7.6bn, that is a significant figure. 

However, City analysts are forecasting $14.5bn of profits for the company this year. Higher oil prices, in general, will offset the lost income from the Russian holding. 

Undervalued

Further, the stock is currently trading at a forward price-to-earnings (P/E) multiple of 6. I think this takes into account the loss of earnings and does not factor in any potential earnings growth. As well as this low valuation, the stock is also set to yield 4.7% in 2022. 

Having said all of the above, I should acknowledge that the oil price is highly volatile. If the price of ‘black gold’ suddenly collapses, BP shares could face significant selling pressure as analysts will have to revise their growth projections lower. The company may also face substantial financial liabilities for its role in the global climate crisis. 

I think these are the most significant risks the enterprise faces today, and I will be keeping a close eye on them as we advance. 

Despite these challenges, I think the company looks undervalued compared to its potential over the next couple of years. Therefore, I would be happy to add BP shares to my portfolio today as a growth and income play. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

The National Grid share price nosedived 21% in 2 days! Is it time to take advantage?

The National Grid share price tumbled after the company surprised shareholders by revealing plans to raise more money via a…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Dividend Shares

How I’d try to ironclad my second income before interest rates fall

Jon Smith explains a couple of tactics he's looking to implement in his dividend portfolio to try and protect his…

Read more »

Investing Articles

The FTSE 100 still looks cheap to me. But don’t just take my word for it!

The FTSE 100 (INDEXFTSE:UKX) has increased 7.5% since the start of 2024. But I think there’s evidence to suggest that…

Read more »

Investing Articles

What should the Vodafone share price be? Here are 3 possible answers

Our writer uses a number of popular financial measures to come up with an estimate of a fair value for…

Read more »

Investing Articles

Here’s how much I’d have if I’d bought 1,000 shares in this FTSE 100 defence stock 5 years ago

I could have made a pretty penny investing in this leading FTSE 100 defence stock. Now I’m looking at a…

Read more »

Investing Articles

1 potential millionaire-maker UK stock I’d like to buy for the long haul

For long-term investors, here’s 1 UK stock to consider buying right now with the potential to help power a growth…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

These cheap UK shares look way too good to ignore right now

With the UK stock market reaching new highs recently, this Fool plans to grab these two remaining cheap shares before…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

This unloved UK stock could rise 120%, according to a City broker

Some City analysts reckon a once-popular UK stock can recover from its massive recent decline and go on to more…

Read more »