FTSE 100 oil majors BP (LSE: BP) and Royal Dutch Shell have performed well over the last month. BP’s share price has risen from around 462p to 518p, a gain of 12%. In comparison, the FTSE 100 has risen 6.5%.
Today, I’m examining why the share price is outperforming at the moment and looking at whether the shares are worth buying right now.
Oil price surge
One reason that BP’s share price has powered ahead over the last month is that the oil price has surged. The price of Brent crude oil is currently just under $74/bbl, up from $69/bbl a month ago, and up from $52/bbl a year ago. The oil price has climbed recently on the back of lower inventories in the US, as well as concerns about Middle Eastern supply after the recent military strikes on Syria. The last time Brent traded at current prices was all the way back in late 2014.
Naturally, a higher oil price is good for a company such as BP. Higher oil prices translate to higher revenues, cash flows and profits. BP’s dividend coverage has been worryingly thin in recent years, as the oil price collapse significantly impacted profitability. So higher earnings are likely to provide peace of mind for the thousands of investors who own BP for its high dividend. The oil major has advised recently that its break-even price – the price needed to cover capital expenditures and dividends – is around $50/bbl. With the oil price over $70, the outlook certainly looks positive.
So are BP shares worth buying right now? Can the share price keep rising?
Looking at the current valuation, I don’t think it looks stretched. City analysts expect the group to generate earnings of 46 cents per share this year, which at the current share price, places the stock on a forward-looking P/E of 15.7. Sure, that’s a little more expensive than Shell’s forward P/E (14.5) and that of the FTSE 100 (14.2), but I don’t believe that valuation is unreasonable.
It’s worth pointing out that several brokers believe that BP’s share price is undervalued at present. Analysts at HSBC, Credit Suisse and JP Morgan have price targets of 590p, 575p and 560p for the stock respectively.
One attraction of BP shares right now is the high dividend yield on offer. The oil major paid its shareholders 40 cents per share for FY2017, and I would expect the same payout this year. At the current share price that equates to a nice yield of 5.5% – handy in the current low-yield environment. While dividend coverage this year still isn’t likely to be anywhere near the 2 times level that is generally regarded as safe, an expected ratio of 1.15 times certainly looks better than the dividend coverage ratios of the last few years.
Overall, I believe BP shares offer long-term value right now. The share price could fluctuate in the short term due to oil price volatility, but the outlook seems positive for long-term investors.
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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has recommended BP and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.