The BP (LSE: BP.) share price saw some wild swings both up and down in 2023. That was despite it only falling 4% during the course of the year. I took advantage of this to top up when it dipped, as I believe it’s being fundamentally undervalued by the market.
2023 – a challenging year
At the start of 2023, I said it would be nigh on impossible for the share price to repeat the meteoric rise of the previous two years. After all, in both 2021 and 2022 it beat the FTSE 100‘s gains by quite some margin.
In the wake of record profits, in February it scaled back its green commitments. The market reacted positively to this. However, this momentum was short-lived and investor interest waned.
Then, in October it surged again. That was on the expectation of higher oil prices as a result of the tragic Israel-Hamas war. But disappointing Q3 figures in its gas markets and the sacking of its CEO, meant it ended the year on a downward trend.
Oil isn’t tobacco
This all highlights how, in the short term, its share price reacts to the ebbs and flows of underlying oil prices. Therefore, a disappointing trading year is neither here nor there to me.
I invest in a business because I believe that a mismatch exists between the value placed on it by the market today versus what it will place on it in the future.
Let’s face it, a lot of investors aren’t interested in investing in oil and gas. They see this as an industry in long-term decline.
I too share the frustration of the lack of progress toward a greener economy. But I don’t let that fact get in the way of making sound investment decisions. I didn’t in 2020 when oil turned negative, and I won’t today either.
The reality is that the world is likely to rely on oil and gas for many decades to come. In its recent flagship report, World Energy Outlook 2023, the International Energy Agency stated that oil consumption would peak by 2030.
However, up to 2050 it predicts that oil demand will only very gently decline. Indeed, throughout the report they stress that investment in oil and gas will continue to be required way into the future.
Low P/E multiple
Today, BP trades at a price-to-earnings (P/E) multiple of just four. This is significantly lower than its industry peers, notably Shell, ExxonMobil and Chevron.
Much of this fact can be put down to the huge write-downs to its investment in offshore wind. This has hurt the balance sheet with net debt rising over the past year. It currently stands at $22.3bn.
In my opinion, another reason why it has fallen out of favour with the market, is a lack of any mergers or acquisitions (M&A) in the pipeline. For example, last October ExxonMobil agreed to buy Pioneer Natural Resources for $60bn.
BP has made it clear that M&A is not on its mind. I think that’s the right decision. It already has a great upstream portfolio with 36bn barrels of total resource. It’s also heavily invested in a number of growth initiatives such as biofuels and electrification. For me, this is not a company in decline.
