BP’s (LSE: BP) share price rose nearly 6% yesterday (6 February) after the release of its Q4 2023 results.
As a long-term retail investor, buying on the rise is okay with me if there is still value in the shares. This depends on two factors.
One is whether the business looks strong, which partly depends on the outlook for the sector in which it operates. The other is how its share price looks relative to those of its peers.
The global energy market outlook
The broad outlook for the energy sector in which BP operates looks bullish for three reasons, in my view.
First, the transition from fossil fuels to cleaner energy is likely to take at least until 2050, and probably longer.
December’s UN Climate Change Conference said that 2050 remains a net zero emissions target. But it added that this must nevertheless be done “in keeping with the science”.
Second, a “large disruption in oil supply” could push oil prices to $157 a barrel, according to the World Bank.
Currently, the Brent benchmark price is around $79 a barrel. Such a disruption could come as tensions rise in the Middle East after US attacks on Iran-backed proxy militias.
Third, China’s economy looks like it will continue to recover after three years of Covid. It achieved its 2023 economic growth target of “around 5%”, recording 5.2%.
“Around 5%” is the target again for this year. And China has introduced several economic stimulus measures to ensure it is met.
Strong business results
BP posted Q4 underlying replacement cost profit (net income) of $2.99bn, exceeding consensus analysts’ forecasts of $2.77bn.
It also reduced net debt to $20.9bn for 2023 — the lowest in a decade — from $21.4bn in 2022.
This reduces the risk in the shares of a further expansion of debt. A sustained slump in commodities prices remains a risk for the shares.
Another is the company yielding to pressure to expedite its gradual energy transition strategy. This could mean it misses out on continued fossil fuel opportunities. It could also mean that it hurries along energy transition systems and processes that have not been fully tested in the field.
Interim CEO Murray Auchinloss said after the results announcement that BP remains committed to reducing oil production 25% from 2019 levels by 2030.
However, he added that to end-2027, the company could increase oil output beyond its 3% target for the 2022-2027 period.
Share valuation relative to peers
BP currently trades at a price-to-earnings (P/E) ratio of just 4.1 against a peer group average of 11. The group comprises Petrobras at 4, Shell (10.5), ExxonMobil (11.2), Chevron (13.4), and Saudi Arabian Oil (16.8).
Therefore, on this key measurement, BP looks very undervalued.
However, short-term support for its share price may come from $3.5bn of share buybacks in H1 this year, announced alongside the Q4 results. A total of $14bn in buybacks is planned by the end of 2025.
Consequently, BP meets my key criteria on whether it has sufficient value left in it for me to buy more.
Another benefit in my view is that its 4%+ dividend yield is in line with the FTSE 100 average of 3.9%. This means any share price gains can be seen as an added benefit on top of a reasonable basic return.
