Can BP’s refocus on oil and gas production turbocharge its share price?

BP’s share price has lagged behind its peers that have concentrated fully on oil and gas, but now it too has said it will refocus on these fossil fuels.

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BP’s (LSE: BP) share price has lost around 14% of its value since its 18 October 12-month traded high of £5.62.

Part of the fall reflects a decline in the oil price over that period. But a larger part results from its much greater focus on renewable energy than its key rivals, in my view.

Often these projects require enormous investment over many years before any profit is seen.

Additionally, BP’s focus on these has caused many investors to believe it is missing out on lucrative oil and gas opportunities. The oil price is still at historically strong levels after Russia’s 2022 invasion of Ukraine.

Relative valuation gap

As a result, BP’s share valuation has slumped against its main competitors with a less aggressive green energy programme.

On the key price-to-earnings (P/E) measure, it trades at just 10.8. The average P/E of its principal rivals is 14.1, so it is cheap on that basis.

Refocus on oil and gas production

Crucially though, BP was reported last week to have shifted back to an emphasis on oil and gas production.

It has paused expensive new offshore wind projects that will take years to generate income.

And it is prioritising investing in and possibly acquiring oil and gas assets. This includes allocating more capital to develop new sites in the high-potential Gulf of Mexico fields.

That said, it will continue to look at low-carbon opportunities, provided they can generate profits in the short term.

A risk here for the shares is any government pressure to revert to concentrating its efforts on the energy transition. Another risk is that the currently bullish demand-supply outlook in the oil market reverses.

Where do the shares go from here?

Shell’s valuation compared to its rivals was also significantly lagging behind those of its competitors until recently.

However, its shares have strengthened since it scaled back some of its energy transition milestones. They still have further to rise, in my view, but the trend looks bullish.

I think the same may happen for BP. Since the renewed focus on oil and gas was reported, its shares have gained value.

But a discounted cash flow shows the stock still to be around 43% undervalued at £4.82. Therefore, a fair value would be around £8.46.

This does not necessarily mean that they will reach that price. But it does underline to me the scale of potential share price gains.

Shareholder rewards increased

An additional boost is likely to come from greater shareholder rewards, I think.

BP has reiterated its commitment to $3.5bn in share buybacks in H1 this year.

This is part of its plan to repurchase at least $14bn in shares by the end of 2025. Buybacks tend to be very supportive of prices.  

It also increased its first interim dividend by 10% from 6.61 cents (5.17p) a share to 7.27 cents.

If this were applied to the total 2024 dividend, the payout would be 30.8 cents, giving a yield of 5%. This compares very favourably to the average FTSE 100 payout of 3.6%.

Given its refocus on oil and gas, its undervaluation, and its rising yield, I will be adding to my holding very 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. and Shell Plc. 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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