BP’s (LSE: BP) share price has been on a bullish run since April. That was when it announced it had purchased 9m shares as part of the buyback programme started in February. Such programmes tend to support share price gains, and this one ended a previous losing streak.
This had been caused by reports that activist investor Elliott Management had increased its stake in BP and was pushing for strategic change.
It was rumoured that it wanted the firm to accelerate the shift away from green energy and towards fossil fuels announced in February. This was opposed by many shareholders who voted against the reappointment of Helge Lund as BP’s chair.
After his eventual reappointment and the reiteration of the strategic shift, I added to my holding. Since then, there have been several major new oil and gas developments that have supported BP’s share price.
The $25bn deal
The most recent was the 2 October activation of a $25bn (£18.73bn) five-pronged energy megadeal in Iraq. This focuses on five huge oil fields in the northern Kirkuk area.
These are estimated to hold 9bn barrels of oil reserves, plus ‘associated’ gas. This is gas captured during the oil drilling process, which can then be used for domestic power or exported.
The average cost to recover a barrel of oil in Iraq is the joint lowest in the world – at $2-$3 per barrel (pb). The current global benchmark Brent oil price is around $63 pb.
Iraqi’s Oil Ministry and BP have agreed a preliminary production target of 328,000 barrels per day (bpd). This is expected to rise to at least 450,000 bpd within the next two to three years. The project will last 25 years, but the contract can be renewed.
The other major finds
Just before this, BP also announced it will go ahead with the $5bn Tiber–Guadalupe offshore drilling project in the Gulf of Mexico. This is part of its target to increase its US oil output to over 1 million barrels of oil equivalent (boe) per day by 2030. The ‘oil equivalent’ measure reflects the energy content of different fuels (such as gas) in terms of one crude oil barrel’s worth of energy.
And on 4 August, BP announced the supergiant Bumerangue offshore oilfield find in Brazil. Although no definitive reserves numbers have been released, industry estimates are that it may hold up to 2.5 billion boe. This could produce up to 400,000 boe per day for decades, and BP has a 100% stake.
My investment view
A risk to BP is that oil and gas prices enter a prolonged bearish trend. That said, consensus analysts’ forecasts are that its earnings will increase by a stellar 30% a year to end-2027. And it is growth here that powers any firm’s share price and dividends higher over time.
In tandem with this, analysts project that BP’s dividend yield will rise to 6.1% by end-2027. The current FTSE 100 average is 3.3%.
Meanwhile, a discounted cash flow valuation shows BP shares are 57% undervalued at their current £4.20 price. Therefore, their fair value is £9.77, and in my experience assets converge to their fair value over time. So I expect the shares to rocket in price long term.
Consequently, I will buy more of the stock very soon.
