The BP (LSE: BP) share price is still down around 10% from its 18 October 12-month high. But just because it’s fallen doesn’t mean it’s a bargain now – it may simply be that the company’s worth less than it was before.
Yet it could be a bargain, and to find out whether it is, I should start with some hard numbers.
Is it undervalued?
Beginning with the key price-to-earnings (P/E) stock valuation measurement, BP currently trades at just 6.9. This is by far the lowest in its peer group, the average P/E of which is 13.6.
So, BP is demonstrably undervalued on this metric. How undervalued in cash terms, though? A discounted cash flow analysis shows the stock to be around 44% undervalued at its present price of £4.98. So a fair value would be around £8.89.
This doesn’t necessarily mean it will ever reach that price, of course. But it does again confirm to me that BP shares are lowly valued at their current price.
Additionally, they could see a further price bump from $3.5bn in share buybacks planned in H1 this year. Buybacks tend to be supportive of share price rises over time.
Does the oil market look strong?
The share prices of oil companies broadly reflect oil prices, and this has been no different recently.
BP’s share price reached its 12-month high when the benchmark Brent oil price was around $90 per barrel (pb). The stock then fell sharply to the middle of December as Brent dropped to $74pb. Now the benchmark is back up to around $86pb and trending higher.
Why’s it rising? A key factor in the oil market is simple supply and demand. If supply falls while demand remains stable then prices tend to go higher. If demand rises while supply stays stable then they tend to rise as well.
On the supply side, ongoing disruption of critical oil maritime routes through the Middle East by the Houthis has hit oil shipments.
Additionally, the OPEC+ cartel of major oil producers cut 2.2m barrels per day (bpd) of supply to the end of Q1. On 3 March, several key OPEC+ members extended these cuts to the end of Q2 at least.
Is the company in good shape?
BP posted Q4 underlying replacement cost profit (net income) of $2.99bn, exceeding consensus analysts’ forecasts of $2.77bn.
A sustained major drop in oil prices remains a risk for the shares, of course. Another is the company needing to expedite its gradual energy transition strategy. This could mean it misses out on continued fossil fuel opportunities.
However, CEO Murray Auchinloss said after the results that BP might increase oil output beyond its 3% target for the 2022-2027 period.
He added that it nonetheless remains committed to reducing oil production 25% from 2019 levels by 2030.
In short, this looks a sensibly balanced energy transition strategy to me.
BP also increased its dividend by 17% — to 28 cents (22p) from 24 cents. It’s now yielding 4.5% at the current £4.93 share price. This compares favourably to the current FTSE 100 average yield of 3.9%.
For its potential price gains, solid dividend, and balanced energy transition strategy I will be buying more BP shares very soon.
