After more than doubling, is the BP share price still undervalued?

The BP share price has been soaring in recent months, due to the rising oil price. Amid growing profits, is it still undervalued?

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The BP (LSE: BP) share price has faced a tumultuous few years. At the lows of the pandemic, it sunk to under 200p, as demand for oil entirely dried up and BP posted large losses. However, due to the soaring price of oil, things have been far more optimistic for the company recently, and its share price has managed to hit around 440p. This is a 130% increase from its pandemic lows. The BP share price has also managed to soar around 40% in the past year. But as the oil price continues to soar, can the BP share price rise further? 

Q1 trading update 

At a first glance, BP’s Q1 trading update looked fairly poor. In fact, the company reported a loss of $20.4bn, compared to a profit of $2.3bn in the previous quarter. However, this loss was attributable to the company’s decision to exit its 19.75% shareholding in Rosneft and other businesses in Russia. This led to pre-tax charges of around $25.5bn. However, this loss has not affected the cash position of the firm, and I do not believe it is overly problematic. 

Further, the rest of the results were excellent. For example, underlying replacement cost profit, which is a more accurate measure of profitability for the firm, totalled $6.2bn, compared to $4.1bn for the previous quarter. Operating cash flow was also able to reach $8.2bn.

These excellent results have enabled the company to deliver strong returns to shareholders. For example, the quarterly dividend totals 5.46 cents, which equates to a yield of over 3%. In addition, the company has committed $2.5bn for a share buyback programme, which will be executed before the Q2 results. This should reduce the number of outstanding BP shares, which may have a positive effect on the BP share price. 

What about the future? 

The current results are evidence of the company’s strength at the moment and the price of oil is showing no signs of dropping in the short term. Therefore, for the next few quarters, I expect excellent profits and very large shareholder returns. I also believe that the firm can continue to pay down its debt, making it more financially healthy for the future. 

But it is the long-term future that concerns me. Indeed, with climate change becoming an increasing worry for society, using oil is not the future. Therefore, BP will be forced to find other sources of profits, likely to come from its renewable energy department. However, although BP has already implemented wider-ranging reforms than other oil companies, this transition into renewable energy will still require significant investment. As such, I believe that the firm’s ability to offer large shareholder returns will be reduced and the BP share price may suffer as a result. 

Is the BP share price undervalued? 

On a short-term basis, the BP share price looks too cheap. Indeed, it trades on a forward price-to-earnings ratio of around five, which demonstrates great value. But I believe that profits may sink in the long term, which could see the BP share price fall as well. As I am a long-term investor, I will, therefore, be leaving BP shares on the side line. 

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 considered so you should consider taking independent financial advice.

Stuart Blair 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.

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