As I write on Monday morning, oil prices are ticking upwards as the world weighs the impact of US strikes on Iran and potential retaliation. And when oil prices push up, investors’ first thoughts are often about the performance of Shell and BP (LSE:BP.) shares.
Today, I want to take a closer look at the latter. For years, BP has traded at a discount to Shell and its American peers partially because of the fallout of the Deepwater Horizon disaster in 2010. The company currently carries around $71bn in debt — that’s a lot for a company with a market cap of $80bn.
Companies with higher debt-to-asset ratios are more sensitive to changes in crude oil prices. When oil prices fall, highly leveraged oil companies face greater pressure on their cash flows, making it more difficult to service debt and maintain shareholder returns.
And the opposite can apply as well… when oil prices push higher, BP could be positioned to benefit more, in relative terms, than its less-leveraged peers. Higher oil prices would significantly boost its cash flow and earnings, enabling faster debt reduction and potentially higher shareholder returns.
Is BP cheap enough?
BP’s valuation is nuanced. The company’s forward price-to-earnings (P/E) ratio for 2025 stands at 12.45, which is modestly below the energy sector median of 13 times. Over the forecasting horizon, the P/E falls to 11.12 in 2026 and further to approximately 9.4 by 2027 and 2028.
When compared to major peers, BP’s forward P/E is notably lower than that of US oil giants such as ExxonMobil, Chevron, and Occidental Petroleum, which trade at forward P/Es ranging from approximately 14.7 to 19 for the same periods. Interestingly, Shell, a closer European peer, has a forward P/E slightly below BP’s at around 11.6. From memory, I don’t think it’s typical to see BP trading above Shell.
| Company | Forward P/E (FY1) | Forward P/E (FY2) | Forward P/E (FY3) |
|---|---|---|---|
| BP | 12.45 | 11.12 | 9.41 |
| Shell | 11.58 | 10.86 | 9.02 |
| Exxon | 17.52 | 14.83 | 12.07 |
| Chevron | 19.03 | 15.52 | 12.84 |
| Occidental | 18.65 | 14.68 | 11.46 |
BP’s valuation actually look rather attractive on net debt-adjusted metrics. The forward EV-to-sales ratio for BP is 0.78 compared to 1.60 for ExxonMobil and 1.55 for Chevron, underscoring this discount. The EV-to-EBITDA ratio is also cheaper.
However, BP’s profitability metrics lag behind its major peers, which largely explains its valuation discount (even when debt is accounted for). For example, BP’s net income margin is negative at -0.64%, compared to positive margins of 4.81% for Shell, 9.73% for ExxonMobil, and 8.03% for Chevron.
Similarly, BP’s EBIT margin stands at 4.89%, well below Shell’s 11.64% and Exxon’s 12.06%. Return on equity (ROE) is also negative for BP (-0.24%), whereas peers like ExxonMobil and Chevron report ROEs above 9%.
Cheaper for a reason
Some of the above metrics might suggest that BP is better value than its peers. However, I’d simply suggest it’s better value when oil is higher and a more concerning proposition when oil prices fall. I think it could be worth considering as a discounted exposure to the sector, but it may prove more risky than peers.
