Some investors might be eyeing BP (LSE: BP) shares, given soaring energy prices amid the conflict in the Middle East. But short-term commodity moves are not a sound basis for any long-term investment decision.
What matters far more is the structural reality that global energy demand is likely to remain elevated for decades. And in many major energy-consuming countries, the transition to renewables could be far slower than forecast.
BP’s strategic exposure to oil and gas, and still to renewables, leaves it well placed to serve these different demands.
But is the stock still undervalued after all the recent short-term interest?
Shifting energy transition deadline
Policymakers target a full energy transition by 2050, in line with the Paris Agreement’s net-zero goal. But the evidence increasingly suggests this timeline is unrealistic.
The International Energy Agency highlights a widening “implementation gap”. It notes that fossil‑fuel demand remains near record highs and current policies are nowhere near a net-zero pathway.
Global consultancy McKinsey reports that less than 15% of the low‑emissions technologies needed for a Paris-aligned transition have been deployed. It adds that several major economies are now delaying or scaling back decarbonisation plans.
With global emissions still rising and countries like China, India, and the US expanding their fossil‑fuel capacity, I believe the world will rely on oil and gas for far longer than commonly assumed.
Are the shares undervalued now?
BP looks significantly undervalued on all the key forward-looking measures I trust. Historical measures are often distorted by one‑off charges and the natural volatility of commodity markets.
The stock’s 0.6 price-to-sales ratio is bottom of its competitor group, which averages 2.2. This is very cheap indeed. These peers comprise Shell at 0.9, ExxonMobil at 1.9, Chevron at 2, and Saudi Aramco at 4.1.
BP’s price-to-earnings ratio of 14.9 against a 20.5 peer group average also looks cheap. And the same is true of its 1.9 price-to-book ratio of 1.9 compared to its competitor average of 2.5.
These metrics point to a company the market may be undervaluing relative to its long‑term cash‑generating potential. This is particularly true when combined with its surprisingly high forecast dividend yield.
Specifically, analysts project a dividend of 27.6p by 2028, generating a yield of 5.4%.
Powered by strong earnings growth
BP’s share price and dividends will ultimately be powered by earnings growth, as with all firms. A risk here is any prolonged period of bearish oil and gas pricing. However, analysts forecast that its earnings will grow by an average of 29% a year over the medium term.
This looks well supported by its recent full-year 2025 results. These saw operating cash flow at $24.5bn (£17.9bn), despite softer commodity prices.
This was underpinned by record operational performance: upstream plant reliability hit 96.1% and refining availability reached 96.3%. These measures matter because high reliability directly lifts volumes and margins, which in turn support dividend cover and long-term growth.
My investment view
I believe long‑term energy demand looks robust, supporting strong earnings growth that should deliver solid cash flows in the years ahead.
BP’s operational performance and rising dividend projections reinforce that momentum, in my view.
Consequently, with the stock still priced well below peers, I will buy more of the shares soon.
I also have my eye on other underpriced high-yield stocks right now.
