Momentum is a key factor when investing, but with mature stocks, investors may want to look for attractive entry points to maximise investment returns. And with the BP (LSE:BP) share price down over 10% since peaking in October, could this be an opportunity?
In my opinion, it certainly could be an opportunity. But with an economic slowdown on the horizon, it could alsobe a risk to invest now.
Hydrocarbon dynamics
September saw oil and gas prices climb on post-pandemic demand, supply chain woes, and global tensions. The Israel-Gaza conflict added a spike through supply disruptions and heightened risk.
However, since then, prices dipped due to economic slowdown worries, increased US oil production, and easing geopolitical anxieties.
Investors may expect more volatility with some geopolitical tensions keeping prices artificially high versus conventional supply and demand dynamics.
So what does this mean for BP? Well, as a vertically integrated oil and gas giant, BP’s earnings are influenced by hydrocarbon prices. In fact, the stock often rises and falls on hydrocarbon price fluctuations.
Looking further into 2024, the obvious conclusion is that falling demand, due to an economic slowdown and OPEC’s challenges, may push hydrocarbon prices down.
However, forecasting oil prices can be a fool’s game. Geopolitics and regional conflict may have a profound impact.
Better than the rest?
BP is one of the ‘Big Six’ vertically integrated oil companies. So how does it compare with its peers?
Well, it’s not clear cut. To start with, it’s worth noting that BP appears cheap. With a forward price-to-earnings (P/E) of 5.8, it’s cheaper than all of its peers, including Eni and Total, which often trade at a discount to the sector.
In fact, BP trades at a 45% discount to its American peers Chevron and ExxonMobil (P/E of 10.8 times and 10.9 times).
The same trend is visible when using the EV-to-EBITDA ratio. BP trades at 3.35 times on a forward basis. The nearest company is also cheaper than Total at 3.71 times.
Looking at profitability metrics, BP is a middling performer, with an asset turnover ratio of 0.8 and a gross profit margin of 34.4%.
However, there are reasons for this discount. And it’s mainly debt. BP’s net debt to equity of 68% is the highest of the Big Six group. Much of this debt relates to the legacy Deepwater Horizon disaster over a decade ago.
A buy thesis?
Personally, I believe demand for hydrocarbons will remain robust throughout the next decade despite the green agenda. This will be engendered by growing populations and the industrialisation of developing economies.
And while BP’s green energy generation is important, I’m expecting this oil giant to remain hugely profitable over the next decade. In fact, I’d expect the next decade to be more profitable than the last.
Despite debt levels, I do believe BP is among the most attractive companies in the space. However, I’m keeping this one on my watchlist with oil on a downward trend. There may be better entry points ahead.
