BP (LSE:BP) shares are now down 5% over 12 months. It’s the first time in a few years where we can see a negative 12-month performance.
That means if I’d invested £1,000 in the energy giant a year ago, today I’d have £950, plus dividends. Over that period I’d have received around £40 in dividends. So I’d be in for a net loss of £10.
Clearly that’s not great, and I may be concerned about the downward trajectory of the stock. Since peaking in October — as tensions rose in the Levant — the stock has lost around a fifth of its value.
However, falling share prices can represent an opportunity for investors. So is now a good time to invest in BP stock? Let’s explore.
Black gold
BP is more than just an oil and gas company. But commodity prices have a huge impact on its margins, and its earnings.
So what are we looking at for 2024? Where will oil go?
Well, oil prices are expected to hover around $80 per barrel in 2024, balancing between moderate demand growth and ample global supply.
Short-term spikes due to geopolitical risks are possible but, overall, it could be a year of relative stability despite recent market jitters.
And that’s fine, because BP has a magic number… $42 per barrel. That’s the oil price it needs to break even, where costs don’t swallow profits.
Incidentally, this is much lower than most Middle Eastern petrostates where the oil might be cheaper to produce, but it needs to remain — on average — above $60 per barrel to avoid a government deficit.
Moving forward to the second half of the decade, we’re likely to see oil prices remain higher. In fact, BP’s forecast suggests oil will be on average $10 higher this decade than last.
And, to some extent, that will be reflected in rising production cost. There is less and less ‘easy oil’ around these days, and companies need to spend more to extract it.
Because of this, I actually think a hydrocarbon investment wouldn’t be bad idea right now.
The value option
BP is one of the ‘Big Six’ vertically integrated oil companies. So how does BP compare?
Well, all the Big Six, with the exception of Italy’s Eni (which, being partially state-owned, can act in the national interest and not in the interest of all shareholders), have excellent profitability grades at the moment.
For example, BP has a gross profit margin of 34.5% and a return of common equity of 39.3%. These are both strong indicators of profitability.
On a valuation front, BP is the frontrunner. It has the lowest forward price-to-earnings of the Big Six companies, at 5.1 times, and the lowest of a TTM (trailing 12 months) basis, at 4.1 times.
While this may reflect BP’s higher debt burden, which is really sizeable, the British oil giant is still the cheapest on enterprise value-based metrics.
BP’s on my watchlist. However, given the geopolitical situation, notably in the Red Sea, there’s too much risk — lots of things that may, or may not, happen.
