BP (LSE:BP) shares have sunk in the past couple of months, but the fall is nothing compared with what happened when the pandemic struck and the UK went into lockdown.
BP shares fell almost 50% at the start of 2020, reaching £2.51 on 20 March when the government announced strict measures to reduce social contact.
So what if I’d invested £1,000 in BP shares on 20 March 2020? Well, today I’d have £1,892 as the stock is up 89.2% since then. Moreover, I’d have received close to £150 in the form of dividends, taking my total returns above 100%.
Should you invest £1,000 in BP right now?
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That’s a phenomenal return. However, I appreciate it’s very hard to make decisions in those moments. I remembering having the same ‘should I, shouldn’t I’ discussion.
After all, crude oil prices turned negative that year for the first time in history as traders struggled to shift stock amid plummeting demand. Some thought oil would never recover.
Never an easy decision
There’s rarely been an occasion in which I found an investment decision easy. There’s no certainties, even when the valuation metrics look particularly exciting.
While I can note several occasions on which I’ve made the right call, such as investing in Burberry early in the pandemic and investing in the Bank of Georgia and TBC Bank following Russia’s invasion of Ukraine… I’ve also made as many mistakes.
So with BP shares dipping 10% over the last month, am I looking at a buying opportunity?
Valuation
BP has the most favourable valuation metrics versus the rest of the Big Six, trading at 4.2 times TTM (Trailing 12 Months) earnings and 5.7 times forward earnings. From that perspective, it’s better value than Chevron, Eni, ExxonMobil, Shell, and Total.
Even when we take into account its higher debt burden, BP looks good value. Enterprise value (EV) includes in its calculation the market-cap of a company but also short- and long-term debt and any cash on the company’s balance sheet.
So when we look at the forward EV-to-EBITDA, BP once again comes out on top, with a ratio of just 3.3 times.
It’s also not a bad performer when we look at net income margins. BP comes out in third, behind its American peers, but above its European counterparts at 11.3%.
The buy case
Analysts are increasing bullish on long-term oil prices given the slow moving green revolution and limited global supply of black gold. In fact, BP’s own forecasts suggest oil prices will be $10 higher on average over the next decade versus the previous decade.
I don’t doubt that a global economic slowdown might hurt BP and the share price. As such, I may look for a better entry point or practice pound-cost-averaging in an effort to reduce risk. Nonetheless, I find BP an attractive investment opportunity right now.
