BP (LSE: BP.) shares had an impressive run in September, rising over 9% to finish the month at 531p. This rise was part of a wider trend the stock has experienced over the past 12 months in which it has risen over 7%. However, in the last week, it seems to have lost some momentum, falling over 5%. Does this drop present the perfect buying opportunity for my portfolio? Let’s investigate.
Market performance and influencing factors
The sharp uptick in BP’s share price during September was underpinned by a robust surge in oil prices. Brent crude, initially priced at $86 a barrel, climbed to nearly $92 a barrel within the month. This significant boost to oil prices was primarily attributed to supply concerns.
These concerns were driven by the announcement that Saudi Arabia and Russia would be prolonging their voluntary production and export cuts until the end of 2023, vastly reducing supply. This bodes well for companies like BP, as reduced supply pushes up oil prices and translates into rising revenues, earnings, and cash flows.
Valuation and dividend potential
One thing that draws me to the stock is its current cheap valuation. With a price-to-earnings (P/E) ratio of just six, BP shares look like good value to me. This figure is also significantly lower than industry counterparts such as Shell, TotalEnergies, and China Petroleum & Chemical, which trade on P/E ratios of 7.7, 8.1, and 7.9 respectively.
BP also has a healthy dividend yield of over 4%, surpassing the FTSE 100 average. Projections also indicate that this could rise in the future, further sweetening the pot.
Aside from paying dividends, another way BP is using its cash is by buying back its shares. It’s reported that the company plans to undertake a $1.5bn buyback ahead of its Q3 results. This could help drive up BP’s earnings per share, creating value for shareholders.
Not all sunshine and rainbows
Although oil prices have surged in recent months, the longer-term outlook isn’t great for oil giants like BP. At present we still rely on the commodity to fuel our day-to-day life. However, decades from now this likely won’t be the case. As the world moves towards renewable energy, incumbent players like BP will have to reinvent themselves to survive.
This risk has been exacerbated by the recent resignation of CEO Bernhard Looney. He’d laid ambitious plans to turn the company emission-free by 2050. His departure certainly leaves some questions over whether this goal will be achieved.
The verdict
Overall, I think that the recent drop in BP’s share price could present a great buying opportunity for me. With waning oil supply, I think BP’s profits will continue to rise in the near future. In addition to this, the current valuation looks very appealing to me.
Although there’s some uncertainty about the company’s long-term direction, I think the tangible positives outweigh this, so I’m looking to buy some shares for my portfolio in the near future.
