BP (LSE: BP) shares have lost more than 40% of their value over the past 12 months, excluding dividends. This is one of the worst performances of any FTSE 100 stock.
However, as a value investor, I’m always interested in companies that have underperformed, as this could suggest their shares are undervalued, although it doesn’t guarantee it.
As such, I’ve been taking a closer look at the oil company recently, to see if it may be worth adding to my portfolio.
Are BP shares worth buying?
To understand if shares in the company are worth acquiring, I first want to try and understand why the stock has performed so severely over the past 12 months. There’s no one clear answer to this question. Instead, it seems to me as if there are a couple of reasons why investors have been deserting BP.
The oil price has declined substantially since the beginning of the pandemic, which has wiped out the oil major’s profitability. At the same time, investors have been questioning the group’s renewable energy plans.
BP is planning to invest tens of billions of dollars over the next decade or so on renewable energy projects, but this might not be enough. It has already had to write off £14bn of assets as part of the push towards a more sustainable business. Further losses could be on the horizon.
So, those are the challenges the company faces. But what about its opportunities? Well, BP is still a force to be reckoned with in the hydrocarbon industry.
It remains one of the world’s largest oil producers and refining organisations. Revenues in 2020 are projected to exceed $230bn. Barring any unforeseen developments, analysts believe this could translate into profits of $6.2bn for the group in its 2021 financial year. These estimates suggest the business is trading at a forward price-to-earnings (P/E) multiple of 13.3. That’s around inline with the five-year average valuation of BP shares.
Further, analysts have pencilled in a dividend yield of 5.5% for the stock for 2021. That looks exceptionally attractive in the current interest rate environment.
Now, there’s no guarantee that the company will hit either of these targets. If the oil price continues to fall, BP may miss the City’s profitability target for 2021. And that would have a knock-on effect on the group dividend.
Still, with the global coronavirus vaccination programme well under way, I think the oil price outlook is improving. This could support the BP share price, although the oil price is incredibly volatile, and nothing is guaranteed.
Another opportunity available to the company is renewable energy. BP wants to reach 50GW of renewable energy in its portfolio by 2030. If it meets this target, the organisation may dispel investor concerns about its future. The investment would also reduce the group’s dependence on the volatile oil price.
Overall, I think BP will face some significant challenges in the years ahead. But it will also have opportunities. Management needs to focus on dealing with the business’s threats while taking advantage of the opportunities. I believe it will do this and I’d buy the shares today.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.