BP’s (LSE: BP) share price has fallen 19% from its 12 April one-year traded high of £5.40. Much of its price movement has reflected the benchmark Brent oil price pattern. But more recently it has also factored in market perceptions of a change in its energy transition strategy.
Specifically, the market has expected a moderation of its green energy targets and an acceleration of oil and gas production. Analysts believe this shift could redress the valuation gap between BP’s share price and those of its fossil fuel-focused competitors.
Following through on its strategic reset
When BP announced such a strategic reset in its 2024 results, its share price surged 7%. This was despite broadly poor numbers in the annual report. That said, I think the stock has struggled to capitalise on those gains for lack of follow-up news on specific fossil fuel projects.
However, 18 March saw Iraq’s Council of Ministers approve BP’s US$25bn+ contract to develop five Kirkuk oil fields. These are estimated to contain 20 billion barrels of reserves. The cost of removing a barrel of oil in Iraq is $1-$2 per barrel – the joint lowest in the world. I believe that as positive news of this development continues to emerge, BP’s share price will benefit.
The same applies to other oil and gas projects as new development milestones are announced. In this context, the firm recently said it expects to increase its oil production to 2.3m-2.5m barrels per day (bpd) by 2030. Currently, it produces around 1.1m bpd.
Are the shares a bargain now?
The key factor driving a company’s share price is its earnings growth. A risk to this for BP is a reversion to a more rigorous energy transition strategy, perhaps as the result of lobbying. However, consensus analysts’ estimates are that its earnings will now increase a stunning 24.7% a year to end-2027.
Despite this, its 0.5 price-to-sales ratio is at the bottom of its competitor group, which averages 1.8. These comprise Shell at 0.8, ExxonMobil and Chevron each at 1.5, and Saudi Aramco at 3.5. So BP looks a bargain on this measure.
The same is true of its 1.16 price-to-book ratio against a peer average of 2.3. So I ran a discounted cash flow analysis to ascertain where its price should be, based on cash flow forecasts. This shows BP’s shares are 59% undervalued at their current price of £4.36. Therefore, their fair value is £10.63, although stocks move up and down in price all the time.
A good dividend bonus
Its strong projected earnings growth should also power its dividend higher. It paid a total of 31 cents (24p) a share in 2024, which currently yields 5.5%. So investors considering a £10,000 holding in BP could see dividends of £7,311 after 10 years and £41,874 after 30 years.
These numbers are based on an average 5.5% yield and ‘dividend compounding’ being used. However, analysts forecast the payment will increase to 25.4p in 2025, 26.5p in 2026, and 27.6p in 2027. These would generate respective yields based on the current share price of 5.8%, 6.1%, and 6.3%.
I expect its strong earnings potential will cause its share price to soar over time. It should also push its dividend much higher. Consequently, I’ll buy more of the shares very shortly.
