Thinking about buying BP shares after the 15% drop? Here are 3 things to know

BP shares look cheap right now. But those looking to buy should be aware that the oil giant is facing some challenges at the moment.

| More on:
Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Edward Sheldon 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.

More on Investing Articles

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

4 penny stocks I’d love to buy for my Xmas stocking!

I'm hoping to buy these top penny stocks when I next have the opportunity. I think they could be some…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Why I believe the lagging FTSE 250 is a rare opportunity to buy cheap shares now

The FTSE 250 is showing some attractive numbers and they suggest some cracking value among businesses listed in the index.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is this FTSE 250 TV giant one of the best opportunities on the market right now?

A staple name among UK television lovers, this FTSE 250 stock has fallen substantially. Is it time to buy the…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could this 2.5% yielding penny stock soar in 2024 and beyond?

This penny stock has struggled throughout 2023 but could the new year provide it with a much needed positive momentum…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to buy in December [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Close-up of British bank notes
Investing Articles

With £500 I’d start a passive income portfolio with these UK shares

Owning shares in an established business can be a great source of passive income. And Stephen Wright thinks now is…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I’d buy these FTSE 100 and small cap stocks in 2024 to target a second income!

This FTSE share offers a 6% dividend yield and trades on a rock-bottom P/E ratio. Here's why I'll buy it,…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s one excellent FTSE 100 value stock investors should consider buying

Sumayya Mansoor explains why this packaging giant is currently in value stock territory and should be on investors radars.

Read more »