Shares in FTSE 100 oil and gas giant BP (LSE: BP) are close to their seven-month high.
For long-term investors, this should not be a major concern. But many do not like the idea of buying near the top of a recent price range. After all, who wants to sit on a loss for weeks, months or even years if it can be avoided?
I already have shares in BP. But if I did not I would still buy them at the current price for four key reasons.
Bullish oil and gas market
Since Russia invaded Ukraine on 24 February 2022, the oil and gas market has been in a bullish trend. Sanctions imposed on top-three oil and gas producer Russia dramatically reduced supplies and pushed prices up.
Further support has come from OPEC+ oil cartel production cuts. Saudi Arabia announced on 5 September that its 1m barrel-per-day (bpd) cut will continue until the end of the year. And Russia said it would extend its 300,000 bpd cut to the same point.
Of course, there is the risk that a drop in oil and gas demand offsets recent supply cuts, causing prices to fall. Another risk for the share price is that lobbying by anti-oil groups may affect BP’s operations.
Well-managed energy transition
The company is managing its transition into a renewable energy world in a measured way. This aligns with the idea that the change may take a lot longer to effectively implement than often thought.
In 2022, renewable energy comprised just 5.5% of the total global energy supply, according to the International Energy Agency (IEA). The same agency said that government pledges fall well short of achieving greenhouse gas ‘net zero’ by 2050.
OPEC+ believes that oil and gas will still be contributing 52% of the global energy mix by 2040.
BP’s aim is to become a net zero company by 2050 or sooner. Given this, it intends to reduce oil and gas production by 25% by 2030.
Increasing shareholder rewards
Last year, the company’s total dividend was 24 cents per share. Based on the current exchange rate and share price of £5.47, this gives a yield of 3.7%. This is not very exciting for me, as the average FTSE 100 yield is 3.8% now.
However, the Q1 and Q2 dividend payments were 21% higher than the same payments last year. If that occurred with 2023’s total dividend, based on the current share price, the yield would be a healthier 4.4%.
Additionally positive is that BP committed to using 60% of 2023 surplus cash flow for share buybacks. It will undertake another $1.5bn buyback before reporting Q3 results. This is generally supportive of a company’s share price.
Undervalued to peers
These reasons lead me to be positive about BP’s long-term prospects. Happily as well, the shares also appear to be undervalued even at the current high price.
According to the price-to-earnings (P/E) ratio measurement, BP currently trades at 6. Shell trades at 7.6, and both China Petroleum & Chemical and TotalEnergies trade at 8.1. Factoring in the outlier in the group — Brazil’s troubled Petrobras — the peer average is 6.7.
BP is also markedly undervalued compared to the present average 10.8 trailing P/E of the FTSE 100.