I watched the BP (LSE: BP) share price slide for more than a year before adding the oil giant to my portfolio on 19 September.
I thought it looked superb value trading at 411.5p, with a price-to-earnings (P/E) ratio of just 6.1. Yet the slide continues, and today I can buy BP shares for 386.6p. They’re 6% cheaper.
As with any stock, BP isn’t perfect. Its shares can be volatile. Energy and commodity prices are highly cyclical. Also, they’re beyond the company’s control. BP’s revenue can rise or fall by billions, and there’s little the board can do about it.
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One of the cheapest stocks on the FTSE 100
When Vladimir Putin ordered the invasion of Ukraine in 2022, crude oil spiked to around $125 a barrel and BP’s revenues spiked and its share price duly followed.
But as the West sourced alternative energy sources and the oil price eased, BP’s revenues and shares slumped. So it goes.
Brent crude has been bobbing just above the $70 mark lately. There’s been speculation that US President-elect Donald Trump’s ‘drill, baby drill’ oil policy will drive it to $65 or less. Bad news for BP, naturally.
Personally, I’ve learned not to speculate about the oil price. A host of analysts constantly pump out reports looking at where energy charts will go next. A blindfold and a pin would do a similar job. There are just too many variables and unknowns.
So how do I approach that conundrum as an investor? Partly by accepting that any stock purchase has a whiff of the roulette wheel. But also by looking at the things I do know. Like this.
Today, BP shares look even cheaper than when I bought them, with a trailing P/E of 5.69 times. That’s less than half the average FTSE 100 P/E of 14.2 times. It’s also well below BP’s median P/E ratio for the last 13 years, which is 15.54 times.
Great value and a high yield – what’s not to like?
The BP share price looks just as good value measured by its price-to-sales ratio of just 0.4. That suggests investors pay just 40p for each £1 of earnings. On the other hand, those earnings may fall if the oil price does.
BP shares have fallen 18.97% over the last year. A sliding share price drives up the yield (assuming the dividend holds), and BP is forecast to pay income of 6.3% over the next 12 months, covered exactly twice by earnings.
The trailing yield is 5.8%, but with more generous cover of 3.1. So we may not see as much dividend growth. Perhaps BP will trim share buybacks. They’ve been running at the rate of $1.75bn a quarter.
There are still risks. BP has to show it can navigate the energy transition. While net zero has hit a bump in the road, many countries including China are still increasing renewables capacity at speed. There’s a chance fossil fuel demand peaks leaving BP stranded.
We can’t assume BP will always remain a FTSE 100 stalwart, but we can’t assume that about any stock. I can’t see the future but I can see today’s price and it looks too cheap to ignore. I’ll top up my stake when I get the cash.
