In 2021 so far, the BP (LSE: BP) share price has performed well, rising around 17% and nearly reaching 300p. Nonetheless, this is still around 35% lower than its pre-pandemic price, and I feel that the shares are undervalued. Personally, today’s trading update reinforces this. So, let’s take a further look.
The trading update
For the first half of 2021, BP announced a replacement cost profit of $5.7bn. This compares to an $18.2bn loss last year and reflects the much-improved environment for the oil giant. Indeed, crude oil is now priced at over $70, and this is the underlying reason for BP’s excellent first half.
Net debt was also able to decrease further to $32.7bn, a reduction of around $8bn from the year before. The huge debt pile was one of my major concerns with BP last year, and it is extremely promising to see this being cut. It is also allowing the firm to increase its shareholder returns.
In fact, due to surplus cash flow, BP is going to buy back $1.4bn of its shares in the third quarter. This is an extremely large amount and will hopefully have a positive effect on the BP share price. This is because it increases the ownership stake of all the other shareholders. For the future, it also expects to be able to deliver buybacks of around $1bn per quarter. But this is contingent on the price of crude oil remaining above $60.
In terms of the dividend, this was also increased by 4% from last quarter to 5.46 cents per share, and further 4% increases are expected quarterly. This equates to a high yield of over 5%.
Transition to greener energy
I initially bought BP due to its promises of transitioning to greener energy, and it seems that this is going well. Indeed, it has already built a 21GW renewable pipeline, reached over $10bn of divestment proceeds and bought renewable energy assets in the US, Portugal, Greece and other countries.
Due to the pressing issue of climate change, I feel that this transition into greener energy is essential to the long-term future of oil companies. As such, provided that change occurs at sufficient speed, I believe that the BP share price will be able recover to its pre-pandemic price at some point.
Nonetheless, there are many sceptics with this transition into greener energy. In fact, it will require significant investment, which may reduce the money that can be returned to shareholders. This may be a worry for income investors. Further, BP will still remain heavily dependent on its traditional oil business for many years to come. Declining oil prices will, therefore, have an extremely negative effect on profits.
Can the BP share price rise further?
Although I acknowledge the risks in the long-term future of the firm, I feel that it is still undervalued. This has been reinforced by the recent trading update, which has caused the BP share price to rise around 4% this morning. I believe that there is further to go, and this is the reason why I’m buying more shares.
Stuart Blair owns shares in BP. 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.