BP’s (LSE: BP) share price jumped 7% on 11 February’s Q4 and full-year 2024 results. This was despite the numbers being poor in some respects.
Its $1.169bn (£0.94bn) Q4 underlying replacement cost profit was 61% down on the same quarter last year. It was BP’s worst quarterly profit result in four years.
Q4 operating cash flow was 21% lower year on year at $7.427bn. Adjusted earnings before interest, taxes, depreciation, and amortisation fell 20% to $8.413bn.
The only positive from my perspective was that the oil giant stuck with its previous guidance on shareholder returns. Specifically, it pledged another $1.75bn buyback (these tend to support share prices) and paid a final 8-cent dividend.
This brought the total annual payout to 31 cents – up from 28 cents in 2023. The sterling equivalent has yet to be fixed, but the current exchange rate would give a 25-pence figure. On the current share price of £4.66, this would yield 4.8%.
So why’s the stock up?
Two key reasons pushed BP’s share price up although they may well be connected, in my view. The first was news that activist US hedge fund Elliott Investment Management has taken an undisclosed stake in the firm.
The second was BP’s statement in the Q4 results: “We now plan to fundamentally reset our strategy and drive further improvements in performance”.
The firm will give full details of this strategic reset in its capital markets update on 26 February. However, the firm also said the reset would be “building on the actions taken in the last 12 months”.
Many seem to believe this will extend the ongoing shift to a more pragmatic approach to BP’s energy transition strategy. This could include further reductions in low-carbon investments and increases in oil and gas production projects.
BP previously confirmed plans to increase US oil production to 1 million barrels per day (bpd) by 2030. It currently produces around 650,000 bpd.
And in August it signed a preliminary deal to develop oil fields in Iraq containing 20 billion barrels of reserves. The cost of removing a barrel of oil in Iraq is the joint lowest in the world alongside Iran and Saudi Arabia at $1-$2 per barrel.
I think the main risk to BP is a reversion to its previous rigid energy transition strategy. This would widen the valuation gap to its fossil-fuel-focused competitors, in my view.
However, analysts forecast that BP’s earnings will increase 25.6% a year to end-2027. And it is ultimately earnings growth that powers a firm’s share price and dividend higher.
Are the shares undervalued?
On the key price-to-sales (P/S) ratio, BP currently trades at just 0.5. This is bottom of the competitor group, which averages 1.8. So the stock looks very undervalued on this measure.
The same is true of its 1.4 price-to-book ratio against a peer average of 2.3.
A discounted cash flow analysis using other analysts’ figures and my own shows BP shares are technically 45% undervalued at £4.66. Therefore, the fair value for the stock is £8.47, although market unpredictability may push them lower or higher.
Given the projected earnings growth and the strategy reset, I will be adding to my BP holding very soon.
