BP (LSE:BP) shares have been rising since January. In fact, the stock’s up 12.4% over three months. However, over five years, shares in the energy giant are actually down 8.4%. That might surprise some investors given the momentum we’ve seen since the pandemic.
So if I’d invested £1,000 in BP shares five years ago, today my shares would be worth £916. Of course, I’d have received dividends throughout that period, but there were some tough years in there — the pandemic. On average, I’d have received around £20 a year over the period.
In other words, I’d be £16 richer for leaving £1,000 in BP shares for five years. Clearly, that’s not a strong return on my investment. Especially over a five-year period.
What about now?
Should I invest in BP shares today? That’s a good question. I find the dynamics of the Big Oil — the six largest oil and gas majors — sector very interesting. You’ve got the US peers trading at huge premiums, Shell in the middle, and BP trading at a discount and in line with Eni and Total.
Broadly, we can attribute this to strong returns by the US companies — but they’re overvalued in my view — and weak returns at Eni and Total. BP’s discount is largely reflective of its debt position. And much of this still relates to the Deep Water Horizon disaster.
BP is currently trading around 7.6 times earnings from the last year and 8.7 times projected earnings for the year ahead. That’s around 30% cheaper than US-listed Chevron and Exxon.
Using the EV-to-EBITDA ratio, which takes into account debt and net cash position, BP still looks inexpensive. The stock trades at 3.39 times using the ratio, versus 5.69 times at Chevron and 6.83 times at Exxon. It’s also a little cheaper than Shell at 4.36 times.
These relative valuations all suggest that BP stock could be a good buy. However, debt is more of an issue in cyclical industries. After all, servicing debt if oil prices fall below extraction costs would represent a challenge.
Black gold prices
BP has a diverse portfolio and had been diverting a lot of capital towards greener energies. However, the stock rises and falls on the price of oil. Its peers do the same. Over the past month, we’ve seen more movement in oil prices. A month ago, the spot price for Brent Crude was $82 and, at the time of writing, it’s just short of $90.
This is reflective of the geopolitical realities we face today, in addition to supply and demand dynamics. An escalation of wars in Ukraine and Gaza could seriously put global supply under threat. Especially as Russia and the Middle East are among two of the largest exporters/exporting regions.
I’m quite bullish on oil in the long run, noting global population growth, middle-class growth in developing economies, and a slow transition to green energy. My preference in the sector is for either BP or Shell, which is useful as they’re both UK listed.
