Down 9%, BP’s share price looks a bargain to me, as oil trends higher

BP’s share price has risen with oil prices, but it’s still undervalued against its peers, and buybacks, plus a bigger dividend, may give it a further boost.

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BP’s (LSE: BP) share price has been trending up since the middle of January, one month after oil prices started doing the same.

Strong demand for oil and lower supply indicate to me that it will continue to gain in price. This could pull BP’s share price higher with it.

A risk for the stock is that oil market supply and demand dynamics switch around, causing prices to fall. Another is the government pressuring it to expedite its energy transition strategy. This could mean it misses out on continued fossil fuel opportunities.

Is it undervalued?

However, BP looks a bargain to me, trading at a key price-to-earnings (P/E) stock valuation measurement of just 6.9. This is by far the lowest in its peer group — the average P/E of which is 13.9.

So, BP is demonstrably undervalued on this metric. But how much in cash terms? A discounted cash flow analysis shows the stock to be around 43% undervalued at its present price of £5.11. Therefore, a fair value would be around £8.96.

This doesn’t necessarily mean it will ever reach that price. But it confirms to me that the stock looks very undervalued now.

It could see a further boost in the coming months from $3.5bn in share buybacks planned in H1 this year. Buybacks tend to be supportive of share price rises over time.

The oil market looks strong

Oil prices are largely a function of supply and demand, with the remainder of the price action determined by geopolitical risks relating to these.

The International Energy Agency predicts that global oil demand will jump by 1.24m barrels per day (bpd) this year. OPEC+ forecasts that it will rise by 2.25m bpd over the period. This is supportive of oil price rises.

March’s key manufacturing data from China – the world’s largest importer of oil — was the highest reading since May 2023. This points to ongoing rising demand as well from this key global buyer.

On the supply side, 3 March saw oil cartel OPEC+ extend 2.2m barrels per day (bpd) of oil production into Q2. This brings the total agreed cuts to 5.86m bpd – around 6% of global daily demand. This is also supportive of oil price rises.

Geopolitical risks have also risen after Iranian-backed Yemeni Houthis vowed on 25 March to attack major oil producer Saudi Arabia.

On 14 September 2019, Houthi attacks on two Saudi oil facilities halved its oil production. This caused the biggest intra-day rise in oil prices since 1988.

How does the core business look?

Even in a year that saw the benchmark Brent oil price slide 18% to an average $82.49 from $100.93 in 2022, BP made bumper profits.

In 2023, it posted $13.8bn underlying replacement cost profit (net income), with Q4’s $2.99bn exceeding consensus analysts’ forecasts of $2.77bn.

BP also increased its dividend by 17% — to 28 cents (22p) from 24 cents. It’s now yielding 4.3% at the current £5.11 share price. This compares favourably to the current FTSE 100 average yield of 3.8%.

For its potential price gains, solid dividend, and balanced energy transition strategy I will be buying more BP shares soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Bp P.l.c. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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