Down 10%+ this year, the BP share price looks like a true bargain

Stellar results, big deals in its fossil fuels and clean energy ops, plus great trading capabilities make the BP share price seem an absolute steal to me.

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The BP (LSE: BP) share price looks a good deal to me at the current level. You see, I think there are two key reasons why it is down, and neither is justified, in my view.

ESG investors

The first is that many fund managers are guided by environmental, social, and governance (ESG) principles in their investments.

BP’s pledge to become a net zero company by 2050 or sooner doesn’t seem to have got through to them. It has already announced plans for a 25% cut in oil and gas production by 2030.

And it is looking to provide a smooth transition to cleaner energy while avoiding interim energy shortages.

Trading expertise

The second reason, I feel, is that many retail traders do not fully appreciate the scale and scope of BP’s business. Recent headlines about oil prices going down have triggered their caution over energy stocks.

It is an oil firm, right, so it must do worse with lower oil prices than with higher ones? Not necessarily and here is why.

First, BP is not just an oil firm. It is also a major player in the gas sector and clean energy too. It is true that a large part of the gas price is derived from oil prices. It is also true, though, that this proportion varies. Often in the past 12 months, gas prices have soared while oil prices traded up and down.

Second, BP can and does benefit whether oil and/or gas prices go up or down. It is a huge trader in the energy markets, much bigger in volume trading terms than several of the better-known specialist trading firms.

This allows it to ‘short’ oil and gas — that is, selling something now with the expectation of being able to buy it later at a lower price.

Consequently, BP can make just as much profit if oil and gas prices fall as if they rise. And its trading teams are extremely good at what they do. Last year, according to industry estimates, these teams made around 14% of the group’s entire earnings.

A growth and dividend star

These trading capabilities were hinted at – but they are never specifically published – in BP’s Q1 results.

Overall, the underlying replacement cost profit for the quarter was $5bn, against $4.8bn in Q4 2022. According to BP, this reflected an exceptional oil and gas trading result among other factors. Those commodities’ prices had gone up and down significantly over the quarter.

During Q1, BP also completed $2.2bn of share buybacks from surplus cash flow. It is committed to using 60% of that cash flow for future buybacks this year.

In its 2022 results, it raised the Q4 dividend payout to 6.61p per share, taking the yearly total to 24.08p. The company stated in the results that “a resilient dividend remains [our] first priority within a disciplined financial frame”.

The chief risk for the BP share price, I feel, comes if the company is pressured into expediting its transition to cleaner energy. This could create failures in its energy delivery networks. There are also risks to its infrastructure in some high-risk regions in which it operates.

However, I already hold positions in BP. If I did not, then I would buy the shares now for their likely dividend and share price gains.

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.

Simon Watkins has positions in Bp P.l.c. 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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