The past few weeks have seen a minor turnaround in the share price of BP (LSE BP). BP shares are up around 13% since the week before Christmas, after having been in a long downwards trend since April.
Still, over five years the BP share price has fallen 12%. That compares to a 24% increase in price for rival Shell during that period.
Sure, it offers a 5.6% dividend yield. But Shell offers 4%. Across the pond, Dividend Aristocrat Exxon Mobil offers 3.6% and has seen its share price grow by 68% over five years.
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So, might the recent rise in BP shares suggest that is starting to close the valuation gap with its competitors?
BP’s emerging from a strategic fog of its own making
A key reason the company has lagged Shell and especially Exxon is what I regard as a self-inflicted wound.
Some years ago it made a big brouhaha about shifting its product mix towards one that was much less reliant on fossil fuels and emphasised renewable energy. Shell did something similar on a less ambitious scale, while Exxon has largely stayed the course as an oil and gas company.
The economics of that transition never convinced the market. BP under its current management has started to tack towards a less aggressive move away from fossil fuels.
Increasing clarity around that has helped to renew some investor confidence in the firm, as far as I can see.
Trading remains unremarkable
So, what has boosted the share price in recent weeks?
Last week the company issued a quarterly trading statement. But its contents were neither especially exciting nor worrying.
Net debt was expected to end the quarter lower than at the end of the prior quarter, while upstream production was expected to be lower. There were also some negative currency exchange and tax rate revisions to the guidance for the full year.
So, none of that besides the net debt reduction is good — but nothing jumped out at me as especially bad either.
The share price looks potentially undervalued
I think the recent share price turnaround could simply reflect a dawning realisation in the City that the BP valuation had drifted lower than it deserved.
Its market capitalisation of £68bn is hardly cheap, but it is less than half of Shell’s. It is also less than six times last year’s earnings.
Admittedly the company’s earnings have swung around wildly in recent years. But a clearer strategic focus on areas where it has proven expertise and valuable assets bodes well for BP’s future earnings, in my view.
From a long-term perspective, for BP’s collection of energy assets, long business experience, strong brand and extensive downstream marketing operations worldwide, I think the current price looks like a potential bargain.
That does not necessarily mean it will keep going up. The company has more work to do on delivering against a more focused strategy and even then its fortunes will always be largely tied to the oil price, which tends to crash from time to time.
But I do see ongoing value potential here and plan to hang on to my BP shares, hopefully collecting those juicy dividends regularly along the way.
