I already have some BP (LSE:BP.) shares in my Stocks and Shares ISA. But following a Christmas Eve announcement that it’s agreed to sell 65% of one of its subsidiaries, is now the time to consider including the stock in my Self-Invested Personal Pension (SIPP) as well?
Let’s take a closer look.
What’s been agreed?
BP’s decision to sell part of its stake in Castrol, the producer of oils, greases, and fluids for automotive, marine, and industrial applications, is part of its strategy of divesting non-core assets with a view to simplifying its business model and strengthening its balance sheet.
The deal assumes an enterprise value (EV) of $10.1bn and gives an EV/EBITDA (earnings before interest, tax, depreciation, and amortisation) ratio of 8.6. Stonepeak, a US investment firm specialising in infrastructure assets, is the buyer.
But income investors hoping for a special dividend will be disappointed. Instead, BP has said the $6bn+ proceeds “will be fully utilised to reduce net debt”. The oil and gas giant has set itself a net debt target of $14bn-$18bn by the end of 2027. At September 2025, it was $26.1bn.
Of course, reducing debt should lead to an improvement in free cash flow. In turn, this could lead to an increase in the group’s dividend.
Interestingly, BP has a current (29 December) EV of around $116.4bn. For the four quarters to 30 September, its adjusted EBITDA was $37.1bn. This gives an EV/EBITDA of 3.1. If it was valued on the same basis as Castrol, its share price would be around 2.2 times higher.
This suggests BP could be undervalued. If this is the case, it could become a takeover target. Last June, Shell said it wasn’t interested in buying its smaller rival, despite media reports to the contrary. As a consequence of the announcement, City rules mean it was prohibited from making an offer for six months. The moratorium expired on Boxing Day.
In my opinion, buying shares on the basis of takeover speculation isn’t a good idea. But purchasing some because they appear to offer good value is a sensible strategy.
Buyer beware
But BP faces a number of challenges. Its earnings can be volatile due to fluctuating oil and gas prices. And extracting hydrocarbons from deep below the earth’s surface is operationally difficult. In addition, its shares are unlikely to be on the shopping list of ethical investment funds. This means there’s a smaller pool of investors to help drive the share price higher.
However, despite these risks, I think BP’s shares are worthy of consideration. The group’s management is under pressure from some major shareholders to cut costs and improve free cash flow. Compared to Shell, its FTSE 100 rival, its distribution and administrative expenses are relatively higher. Its production and manufacturing costs are also proportionately more. If it can match the efficiency of its industry peer, BP’s profit margin is likely to improve significantly.
But I don’t want to add any to my SIPP because I already hold the stock in my ISA. Buying more would mean my investment portfolio becomes less diversified than I would like. Instead, I’m going to look at some other opportunities.
