BP’s (LSE: BP) share price is down nearly a quarter from its 5 July one-year traded high of £4.91.
Part of this resulted from the benchmark Brent oil price drifting lower over the period. I believe the remainder is attributable to BP’s focus on renewable energy rather than fossil fuels over much of the period.
That said, the strategy reset announced in February to redress this imbalance has done little to help the share price. This included over $5bn (£3.9bn) of cuts to renewables funding and a 20% increase in oil and gas project investments.
I believe the key reason for this is that investors are taking a wait-and-see attitude on these new oil and gas flows.
The Caspian Sea deal, and others
BP announced on 3 June the acquisition of a 35% stake in Azerbaijan’s Karabagh oil project in the Caspian Sea. It also announced an investment in a project designed to boost output at the country’s giant Shah Deniz gas field.
The Caspian Sea basin area holds at least 48bn barrels of oil and 292trn cubic feet of gas. This makes it one of the world’s largest oil and gas reservoirs.
I think expanding its presence in Azerbaijan’s Caspian Sea region should enable BP to drive further oil and production gains. And this comes at an ideal time when Azerbaijan is positioning itself to replace Russian gas and oil supplies to Europe.
A similarly promising development is the $25bn (£18.48bn) deal for five oil fields in Iraq announced in February. These are estimated to hold around 9bn barrels of oil that can be recovered at a cost of just $1-$3 a barrel. The benchmark Brent oil price is around $66 a barrel.
Such production gains by BP could well see it surpass its plans to increase its oil output to 2.3m-2.5m barrels per day by 2030. Currently it produces about 1.1m bpd.
A risk here is that these developments suffer delays for some reason.
That said, consensus analysts’ forecasts are that BP’s earnings will increase a whopping 32% a year to end-2027. And it is growth here that drives a firm’s share price (and dividends) long term.
Are the shares undervalued?
BP is very undervalued on its 0.4 price-to-sales ratio compared to the 1.7 average of its peer group. This comprises Shell at 0.7, ExxonMobil and Chevron each at 1.3, and Saudi Aramco at 3.3.
The same is true of its 1.3 price-to-book ratio against a peer average of 2.1. It is also bottom of its competitor group again.
A discounted cash flow (DCF) analysis shows where any stock price should be, centred on cash flow forecasts for the underlying business.
In BP’s case, the DCF highlights that its shares are 77% undervalued at their present price of £3.74.
Therefore, their fair value is £16.26.
Will I buy more of the shares?
I believe its enormous earnings growth potential should drive the share price much higher. I also think it will do the same for the firm’s already excellent dividend yield.
This is 6.7%, but analysts forecast it will rise to 7% in 2026 and to 7.3% in 2027. The FTSE 100’s present average yield is just 3.5%.
Given these factors, I will buy more BP shares very shortly.
