BP shares are falling! Should I buy on the dip?

BP shares have taken quite a hit over the past few days, wiping out most of May’s gains. So, is now the time to buy?

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BP (LSE:BP) shares slumped on Monday morning, compounding losses from the end of last week. The hydrocarbons giant has seen its share price soar this year, so maybe the current dip is a good opportunity to buy?

Why has the share price fallen?

BP shares, along with other oil and gas heavyweights, dropped 3% on Monday morning as the Brent crude spot price fell for the third consecutive session.

Brent crude — the leading global price benchmark for Atlantic basin crude oils — fell to $120 a barrel, down from $124 just a few days ago.

Oil fell for a number of reasons, including US inflation news as well as British and German GDP forecasts. But, perhaps most apparent is China’s move to introduce new restrictions to slow the spread of Covid-19. Lockdowns in hubs like Shanghai and Beijing will see demand for oil fall.

BP’s prospects

BP’s profitability depends on oil prices. High prices mean higher margins. At $120 a barrel, BP’s revenue is soaring.

In fact, in 2020, BP said it was working to reduce its breakeven price to $35 a barrel by 2021. A number of oil and gas producers embarked on programmes to reduce their per-barrel costs following the 2016 oil price crash and the pandemic.

So, at the current price, BP is hugely profitable despite shedding its Russian ventures earlier this year.

Analysts are expecting the oil price to fall but remain above $100 this year. However, it’s not easy to guess the oil price a few months from now.

Widespread lockdowns in China could tip demand below supply. Likewise, if we see Saudi Arabia, or another nation, increase production, this could push prices down.

Valuation

BP has a price-to-earnings ratio of around 6.5. That’s certainly not expensive. In fact, its forward P/E ratio is 4.5, taking into account the firm’s impressive profit expectations for the year ahead.

But while it looks cheap, it’s important to remember that cyclical industries like oil and gas often trade with lower multiples. This is because they’re more exposed to downturns in the market.

Will I buy BP stock?

I’ve actually stayed clear of oil and gas companies in recent months. It’s not been the best decision so far, but in the medium term, I don’t anticipate hydrocarbon firms will be thriving.

With negative economic outlooks in the UK, EU, and concerning signs in the US, I think there will be some downward pressure on the oil price soon. I’m also concerned about China’s lockdowns and the impact this will have on demand.

There’s also the windfall tax introduced by the UK government on energy firms. The tax will see a 25% levy on UK oil and gas profits, on top of the 40% rate already paid.

So, right now, I’m not buying.

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.

James Fox 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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