BP (LSE: BP.) shares have dipped sharply in recent weeks. Back in mid-October they were trading above 550p. Today however, they’re near 470p.
Thinking about buying the shares after this substantial pullback? Here are three things to know.
The shares look cheap
On the plus side, shares in the oil giant do look cheap after their recent pullback. At present, analysts expect BP to generate earnings per share of 85.9 cents for 2023.
At today’s share price and exchange rate, that equates to a forward-looking price-to-earnings (P/E) ratio of about 6.8. That’s well below the average FTSE 100 P/E ratio (roughly 12.5). So there appears to be some value on offer here at the moment.
Renewable energy challenges
One issue to be aware of however, is the company’s shift to renewable energy is proving to be more than a little challenging.
In BP’s Q3 results, posted late last month, the group booked a $540m pre-tax impairment charge on its New York offshore wind power projects.
The impairment on the projects was due to “inflationary pressures and permitting delays“, according to the company.
As a result of this writedown, BP reported Q3 net income of $3.3bn – well below analysts’ forecasts of $4bn.
After the results, analysts at JP Morgan cut their price target to 550p from 615p.
They also downgraded the stock to ‘underweight’ (sell) from ‘neutral’ (hold), which doesn’t make a lot of sense given that the price target is above the current share price.
The analysts’ view was that the Q3 miss and uncertainty in relation to future cash returns (dividends and buybacks) make the stock less attractive in a volatile market.
Dividends and buybacks
Now, zooming in on the cash returns, they do look decent at the moment. For 2023, BP is expected to pay out 28 cents per share in dividends to investors. That puts the stock’s yield at around 4.8% right now.
On top of this, there are sizeable share buybacks. In its Q3 results, BP said it would be buying back another $1.5bn worth of its own shares before 2 February 2024.
Buybacks tend to boost earnings per share over time (assuming earnings don’t fall), making a stock more attractive from a valuation perspective.
However, looking ahead, there’s no guarantee that dividends or buybacks of this magnitude will continue. And JP Morgan’s analysts noted that momentum in share buybacks is weakening.
My view on BP shares
Are BP shares worth buying considering all of the above? Well, my view is that they are undervalued. I think they have the potential to provide solid returns from here.
However, given the uncertainty associated with oil prices and the company’s shift to renewable energy, there are other shares I would buy first.
