As BP’s share price drops below 400p, is it time for me to start buying?

BP’s falling share price means the oil giant now offers a tempting 6% dividend yield. Is this a bargain buy, or does the stock still have further to fall?

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The BP (LSE: BP) share price dropped below 400p earlier this week. Historically, that’s a level that’s only generally been seen during troubled times for the company.

This year’s slump has pushed BP’s dividend yield up to 6%. I’m wondering whether this slump could be an opportunity to add the oil and gas giant to my income portfolio.

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Why are the shares falling?

Uncertainty in the Middle East has led to increased oil price volatility this year. Any major disruption to supplies could cause prices to rise.

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The oil price has swung around as speculators have bet on different scenarios. Brent Crude oil reached $90 per barrel in April, but has fallen to $74 per barrel at the time of writing.

Another complication is that weaker global demand for refined products such as petrol and chemicals is also hitting BP’s profits.

In its third-quarter update, BP warned that profits from its refineries fell by $400m-$600m during the third quarter.

Are we heading for another oil crash?

Over the last 16 years, I’ve seen the oil market crash on three occasions (2008, 2015 and 2020). That’s not what’s happening now. So far this year, we’ve just seen a moderate slowdown.

According to the September edition of the authoritative IEA Oil Market report, the main reason for this is “a rapidly slowing China”, where oil consumption has been falling in recent months.

At the same time, the IEA says that global oil supply has been rising, despite some outages in Libya and Norway.

The reality is that no one quite knows what will happen next. Lower oil prices might stimulate stronger demand, but this isn’t guaranteed. A deeper slump might be needed to rebalance the market.

A lot depends on what happens in China — something that’s tough to predict.

Is BP cheap enough to buy today?

Bumper profits since 2021 have allowed BP to rebuild its dividend and repay debt. The company has also funnelled billions of dollars into share buybacks – the share count has fallen by a quarter since the end of 2021.

I think BP is probably in better financial health than it’s been for a long time. Even in another crash, I think the company would be likely to cope better than it might have done in the past.

I’m also encouraged by CEO Murray Auchincloss’s commitment to “a resilient dividend”.

In the company’s half-year results, Auchincloss said that the payout should be supported by cash generation at oil prices down to “around $40 per barrel Brent”.

City analysts’ earnings estimates also suggest to me that the dividend will remain safe, barring a major market crash.

The latest broker forecasts for 2024 indicate that earnings of $0.64 per share should be enough to cover the expected dividend twice. That’s generally considered a decent safety margin and gives me confidence in the 6% yield on offer.

On balance, I think the shares look reasonably priced today and probably offer a safe dividend.

However, my sums suggest they’re are not at a truly bargain basement level.

Given the uncertainty facing this business, I’m going to wait a little longer before making a decision.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

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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.

Roland Head has no position in any of the shares mentioned. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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