Does the BP share price scream ‘value’ after its earnings report?

The BP share price might not scream ‘value’, but the stock represents a cheaper alternative to several peers in the Big Oil space. Dr James Fox explores.

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Image source: BP plc

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The BP (LSE:BP) share price had pushed slightly lower in the lead up to its Q1 results on Tuesday (7 May). The oil giant reported quarterly EBITDA of $10.3bn and underlying replacement cost — BP’s measure of profitability — of $2.7bn. That’s down from from $5bn a year earlier.

Earnings missed expectations but BP kept up the pace of its buybacks. BP pointed to higher oil prices during the quarter ($/bbl 83.2 in Q1 24 vs $/bbl 81.2 in Q1 23) but significantly lower gas prices ($/mmbtu 2.3 in Q1 24 vs $/mmbtu 3.4 in Q1 23).

Moving forward, the British energy giant pledged to make further efforts to reduce costs after changing its organisational structure.

What do analysts think?

When I’m trying to evaluate how much a stock is worth, I often start by looking at the average share price target. This, called the consensus, reflects the average price target issued by all City and Wall Street analysts covering the stock in the past three or 12 months.

The average share price target for BP is currently 606p. That’s a 19.6% premium to the current share price. Such a premium is encouraging. The stock currently has seven Buy ratings, six Outperform ratings, three Hold ratings, and one Underperform rating.

While this data is promising, it’s worth bearing in mind that analysts aren’t always right. It’s often also good practice to discard older share price targets. Analysts don’t update their price targets as often as we might assume.

How does it compare with Shell?

BP is one of the Big Six oil companies. This is a group that includes, Chevron. Exxon, Eni, and Total. The two American stocks are by far the most expensive of the group, but they’re also among the most efficient. Eni and Total, are cheaper, but that reflects their lower margins.

Shell, therefore, the other UK-listed stock, is a good comparison. Using projected earnings for the next three years, here’s how the two companies compare on a price-to-earnings (P/E) basis.

P/EBPShell
20247.658.61
20257.468.36
20266.848.01

However, while BP may appear better value than Shell, it’s also the most indebted — partially because of the Deepwater Horizon disaster. Here’s how the two companies compare using the EV-to-EBITDA ratio, which takes debt into account.

EV-to-EBITDABPShell
20243.194.07
20253.124.16
20263.14.15

The bottom line

On the surface, BP shares remain attractive, especially compared to peer Shell. Both companies have embarked on programmes to reduce the valuation gap with their US peers.

BP CEO Murray Auchincloss said he would turn BP into a “higher-value company” after its 2023 results. This includes a plan to produce more oil over the medium term, increase its liquefied natural gas portfolio by 9% by the end of 2025, and commit to more buybacks.

I certainly don’t think BP is a bad investment opportunity, and I may be interested if an attractive entry point emerges. However, like its peers, it rises and falls with oil prices. That’s always a risk despite long-term optimism.

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.

James Fox has no position in any of the shares mentioned. 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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