It’s been a tough year for the BP (LSE: BP) share price, which has fallen 7.31% over the last 12 months. Much of the damage came in the last month, when it felt 8.23%. At today’s price of 445p, the FTSE 100 oil and gas giant is trading at a 52-week low.
Inevitably, the oil price is at the heart of it. Although BP is much more than an oil explorer, its fortunes are still linked to energy prices. A barrel of Brent crude now costs $76.81, that’s 9.52% less than a month ago.
Falling FTSE 100 star
Over one year, Brent is down 10.56% despite Middle East tensions, which have had little impact on supply so far.
The slide is largely down to the slowing global economy, with demand falling across the US, Europe and China. Even falling US inventories have failed to lift prices.
BP’s second-quarter results, published on 30 July, were a mixed bag. The group posted a reported quarterly loss of $100m, down from a $2.3bn profit in Q1. That included $2.8bn of adjusting items, including $1.5bn of impairments. The board also warned production may fall in Q3.
Happily, there was a lot of good news for shareholders too, with free cash flow more than doubling to $4.4bn. The board is keen for shareholders to reap the rewards, hiking the dividend 10% and announcing another $1.75bn share buyback. BP also paid down $1.42bn of its debt pile in the quarter, reducing it to $22.6bn.
Today, BP shares look unmissably cheap, trading at just 6.61 times earnings. Better still, the yield is back above 5%.
Dividend growth potential
BP rebased its dividend after the pandemic but it’s steadily returning to more respectable levels. Let’s see what the chart says.
Chart by TradingView
Today’s trailing yield of 5.01% is expected to hit 5.43% in 2024 and 5.83% in 2025. And don’t forget the share buybacks.
BP can break even with the oil price as low as $40 a barrel, but the higher it goes, the better, obviously. Energy prices tend to be cyclical, and I prefer to buy stocks in the sector when they’re down rather than up. Like today.
Much now depends on the wider economy. Last week’s US stock market volatility was largely caused by the US Federal Reserve’s decision to hold interest rates in August. Some analysts fear that even if the Fed cuts them by 50 basis points in September, it’ll be too little too late to avert a US recession.
I have a longer-term worry. BP appears to have taken advantage of the pushback against net zero to ease back on renewables, but this issue isn’t going away. I buy stocks with a minimum five to 10 year view, and over that time climate change pressures look set to grow. However, as we’ve seen with electric cars, weaning the world off oil won’t be easy.
Despite these concerns, I think BP shares look like a brilliant bargain. At today’s dirt-cheap valuation, I don’t see much point in waiting until they get cheaper. I’ll add them to my portfolio when I have the cash.
