Since the tail end of 2023, the BP (LSE: BP.) share price has been falling. To be precise, over the past three months, it has fallen 18%. Over a 12-month period, the drop is less severe, at 4.5%. After this fall, the current share price is 453p, not far off the 52-week low of 441p. Given this large drop, is now the time for me to look at buying shares? Let’s take a closer look.
A good value stock
BP currently trades on a price-to-earnings (P/E) ratio of just four. This means that investors value that stock at just four times its earnings, which is pretty low by market standards. For context, the average FTSE 100 P/E ratio sits at around 14.
What’s more, analysts anticipate that the oil giant will deliver earnings per share of 88.8 cents in 2024. Based on today’s share price, this results in a forward-looking P/E ratio of only 6.4. At less than half the UK market average, I do see good value in BP shares.
BP also offers a healthy dividend yield of 4.9%. What’s more, the projected dividend for 2024 stands at 30.2 cents. This translates to a yield of approximately 5.3%, higher than the current FTSE 100 average of 3.9%.
A long-term investment
Due to BP relying so much on the price of oil, it remains a pretty speculative investment. For example, BT experienced huge profits in 2022 after booming oil prices. While still profitable in the first nine months of 2023, BT’s underlying profit halved compared to the same period in 2022. The price of oil is expected to remain relatively stable in 2024, at $80 a barrel. However, with mounting tensions across the Middle East and Asia, it’s far from guaranteed.
I also worry about BP’s transition to net zero, a target implemented by many states across the globe by 2050. BP initially outlined its net zero ambitions in February 2020, and continues to refine these goals. However, such a goal is no mean feat for an oil giant like BP, and a complete turnaround in a business plan always comes with huge uncertainty.
It is also worth mentioning that interest rates could come to bite the company. Although rates in the UK have stabilised at 5.25%, analysts estimate this figure to remain for some time. Currently operating with over $22bn in net debt, any further rise in rates could lead to hundreds of millions in added interest payments for BP.
The verdict
Overall, I think BP looks like a solid stock. However, nothing jumps out at me making me want to buy. The shares are cheap and the dividend is a nice to have. However the speculative nature of the business, coupled with the uncertain future continues to worry me. For this reason, I struggle to see BP shares shooting up any time soon. Therefore, I won’t be buying the shares today.
