Back in mid-April, BP’s (LSE: BP.) share price was hovering around the 540p mark. Today however, it’s near 460p – about 15% lower.
Is now the time to consider buying the stock? Let’s discuss.
Value on offer today
At today’s share price, I do see a fair bit of value on offer here. Currently, City analysts expect BP to generate earnings per share of 75.5 cents this year. At today’s foreign exchange (FX) rate, that puts the stock on a forward-looking price-to-earnings (P/E) ratio of just 7.9.
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Given that the average P/E ratio across the FTSE 100 index is about 14, BP shares look cheap right now.
The dividend yield’s risen
Meanwhile, the dividend yield looks attractive too after the recent share price fall. For 2024, BP’s expected to pay out 30.5 cents per share to investors. That translates to a yield of about 5.1%.
That’s attractive, especially now that interest rates are likely to fall. In a year or two, that yield may be far higher than the interest rates available on savings accounts in Britain.
Short-term earnings risk
However, before you rush out and buy BP shares for their low valuation and high yield, there are a few risks to be aware of here.
Earlier this month, BP put out a weak trading update in which it advised that lower refining margins were set to hurt its Q2 earnings (to be published on 30 July).
On the back of this update, analysts at Morgan Stanley downgraded the shares to Hold from Buy, believing BP’s 2025 guidance is at risk. So the shares may not be as cheap as they look.
Long-term uncertainty
And that’s not the only risk here. In BP’s Energy Outlook, which was published on 10 July, the oil giant said it expects demand to peak at around 102m barrels a day next year. In other words, demand for oil may be set to decline after 2025.
It’s worth noting here that BP doesn’t expect oil demand to fall off a cliff. But it does see a gradual decline to around 75m barrels a day in 2050 (it forecast a steeper drop under a ‘Net Zero’ scenario).
So there’s some uncertainty in relation to the long-term story here. It’s worth pointing out that while BP does also focus on renewable energy, it’s been scaling back on efforts here to focus on its more profitable oil and gas operations.
My view on BP shares
Weighing this all up, I won’t be buying BP shares personally. For me, there’s a little too much uncertainty.
But if I was a value or income investor (I’m more of a quality growth investor), I may consider buying them. With interest rates set to come down, a 5.1% dividend yield’s attractive.
