The BP (LSE: BP) share price has had a bumpy month, falling 8.37%. I’ve been wondering whether to add the FTSE 100 oil and gas giant to my self-invested personal pension (SIPP) for months, and following the dip it’s screaming at me to take the plunge. Should I dive in?
I have a problem. I’ve only got £3,000 of cash left in my SIPP. So if I buy BP shares today, it means putting rival targets on the back burner, such as HSBC Holdings and Rio Tinto.
That means I have to be really, really convinced by BP. There’s certainly a lot to tempt me today.
FTSE 100 favourite
Many investors see BP as a core portfolio holding but natural resources stocks can also be highly cyclical as demand waxes and wanes with the global economy. So it makes sense to buy them when they’re down rather than up, in my view. However, that also requires the patience to sit back and wait for them to recover. Or sit tight as they slide further.
BP’s shares rocketed with the oil price after Russia invaded Ukraine but have been sliding as the energy shock recedes. Crude is now at a three-month low as the uncertain global economy hits demand and fears of a direct Israel-Iran conflict recede. Today, the stock looks super-cheap trading at just 6.97 times earnings. That compares to an average valuation of 13 times across the FTSE 100 as a whole.
A disappointing set of first-quarter profits further knocked sentiment, with underlying replacement cost profits crashing from $5bn a year ago to just $2.7bn. Yet that didn’t deter the board from announcing another share buyback, this one worth $1.75bn.
BP shares are down 0.72% over one year, and 11.29% over five (but with plenty of peaks and troughs in between). That certainly tempts me. While it’s no guarantee against further falls, it does reduce the risk of another drop if I buy today.
This stock is hard to resist
Where the oil price goes next is anybody’s guess. OPEC+ manoeuvres, geopolitics and whether we get an economic soft landing will all play their part, along with a host of unknowns. I think there’s a chance it could recover once interest rates start falling and activity picks up. The problem is, we still don’t know when that will be. Ironically, a lower oil price could support BP in the longer run, by deterring investment in renewables.
BP has trimmed its climate goals, which may reduce risk and costs in the short run, but leave it exposed if rivals pioneer clean energy breakthroughs. It isn’t just at the mercy of oil price falls but politicians wielding windfall taxes when profits rise.
Yet the company is still making enough money to keep the dividends and share buybacks flowing until the next oil price spike. A rising yield of 4.98% in 2024 and 5.03% in 2025 is the big attraction here.
At today’s lowly valuation, BP shares are screaming ‘buy me’ in my face. If I was flush with cash, I wouldn’t need to be told twice. Instead, I have a choice to make and I haven’t made it yet!
