The share price of oil major BP has experienced a few twists and turns of late. A new CEO, Murray Auchincloss, was installed in early 2024. We all saw how well a change in leadership worked out for Rolls-Royce. A pivot away from renewable energy was announced earlier this year, too.
That we had Joe Biden of all people insisting “we’re going to need oil and gas for a while” in a State of the Union address (he got cheered for it) suggests to me that the powers-that-be know that shifting away from oil and towards Net Zero isn’t going to be as simple or fast as BP’s green focus was banking on. The share price is still lagging, though, despite these events, down 24% from a high in 2023.
With a solid dividend and cheap-looking valuation, BP shares have the making of a diamond in the rough. Is it time for me to open a position in the UK’s second-biggest oil producer? Could the shares be a great FTSE 100 turnaround buy?
Optimism
If the new strategic pivot is more than just hot air then I might expect to have seen some tangible results by now. Quelle chance! In August, BP announced its largest discovery in 25 years!
The finding was a significant hydrocarbon find off the coast of Brazil. Some estimate are suggesting its worth could be in the tens of billions of pounds. Such a figure looks like quite the coup for the £67bn market cap firm.
The discovery is more about potential than baked in revenues at this point, however. This uncertainty is perhaps why the share price hasn’t shifted since, but it’s a strong sign that operations might be moving in a new direction. Pair the news with an earnings beat in the second quarter and there’s plenty to be optimistic about.
More exposure?
The price-to-earnings ratio, another potential reason for optimism, almost tells a story of its own. BP has traded in the low single digits for most of this decade. One way of looking at that is the firm makes tonnes of money compared to the share price. Another way is that the markets realise that crude oil has a shelf life. Investors are perhaps thinking such huge earnings are not long for this world.
The funny thing is that the P/E ratio for the next year is now 13, much closer to the market average and near the ‘fair value’ number that some use, of 15. Do the markets see more of a future for oil consumption than they did previously? Whether they do or they don’t, this does highlight one of the main downsides for anyone wanting to invest in such a stock. Namely, if the world is still running on oil late into the century then this will be a terrific buy.
Conversely, if the transition to Net Zero is smoother than anyone could have guessed, then BP stock may be a terrible buy (especially in light of said move away from renewables). This little conundrum puts me off from giving myself any more exposure to this sector at the moment.
