The BP (LSE: BP) share price has plunged 21.55% over the past year and is showing no signs of bottoming out.
That’s a dreadful showing from a company whose profits topped $15bn in 2023 and had enough surplus cash to spend $7.9bn buying its own shares and cancelling them.
It’s doing pretty well in 2024 too, with underlying Q2 replacement cost profit up 6% to $2.76bn, beating forecasts, and another $3.5bn of share buybacks completed by halfway point.
Top FTSE 100 value stock
The board committed to another $3.5bn in the second half of the year with more to follow in 2025, as part of its long-term commitment to passing on at least 80% of surplus cash flow to shareholders.
Personally, I prefer a nice juicy dividend to a share buyback as it’s easier to see the impact on my portfolio. BP rebased payouts at 26 US cents per share in 2020 and they’ve idled since. The full-year 2023 divided per share of 28 US cents works out as a handsome trailing yield of 5.57%. Better still, that’s forecast to hit 6.25% next year.
There’s so much to like about BP shares yet they’re dirt cheap trading at price-to-earnings ratio of just 6.04 times. That’s well below half the FTSE 100 average P/E of 15.3 times.
The prime cause of the decline will be obvious to anybody who drives a car or glances at the business news. The cost of a barrel of Brent crude has crashed almost 25% over the last 12 months, and is nudging $70 a barrel.
Traders are betting it will fall further, as the Chinese economy slumps and the US and Europe fail to take up the slack. Despite the oil glut, OPEC+ members are keen to boost production, while Libyan oil exports could soon return. That explains why hedge funds and other money managers have now reduced their bullish bets on oil to the lowest level since 2011.
A brilliant oil sector bargain
BP can break even with oil at $40 a barrel, and it’s aiming to get that closer to $30. That gives it a safety net.
Oil is a highly cyclical sector and it makes sense to buy BP when its shares are down in the dumps, as they are today. They could fall further of course. The net zero push also cast a cloud over the shares, as BP struggles to make the shift to renewables.
Yet as we saw when Russia invaded Ukraine, oil price sentiment can swing in a moment. Something to remember as Middle East tensions remain high. If central bankers accelerate interest rate cuts, this could revive economic activity and energy demand.
The BP share price looks like one of the biggest bargains I’ve seen this millennium. I’m tempted to see if it goes lower still but I’ve learnt the hard way that it’s almost impossible to call the very bottom of any stock or market. With that in mind, I’ll buy BP as soon as I have the cash.
