In October 2020, the BP (LSE:BP) share price bottomed out at around 196p. I’m going to use this as my base figure as it’s the lowest the energy giant has seen since 1994.
At the time, many analysts were wondering whether there was still a future for hydrocarbons producers amid talk of a new normal, with people increasingly working from home and limited air travel for the foreseeable future.
However, that’s not been the case. Hydrocarbons demand has returned, and oil prices have surged on the back of Russia’s war in Ukraine and geopolitical tensions.
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Today, BP shares are changing hands for 464p. That’s up 136.7% since October 2020. So if I’d invested £1,000 in BP shares then, today I’d have £2,367 plus around £100 in dividends. That’s a brilliant return.
The future of hydrocarbons
Investing in energy companies can be more challenging than other stocks. That’s because other industries tend to be more stable than the energy sector.
So what’s the future of hydrocarbons? Well, firstly it’s worth noting that BP has operations beyond oil and gas, however these remain central to the company’s recent success.
Analysts suggest that hydrocarbon prices will remain elevated over the next decade. In fact, BP’s own forecasts predict oil prices to be on average $10 higher over the next decade than the previous 10 years.
That doesn’t necessarily mean oil companies will become more profitable, however. ‘Easy oil’ is a scarce commodity, and production costs will likely rise, especially for non-state, non-OPEC operators.
Valuation
The most relevant comparison is between BP and the rest of the ‘Big Six’ vertically integrated oil and gas companies, perhaps with the exception of Eni.
So here’s how BP compares with its four peers — I’ve excluded Eni from the comparison.
| BP | Chevron | ExxonMobil | Shell | Total | |
| Dividend Yield % | 5 | 4.2 | 3.9 | 4.2 | 4.9 |
| Non-GAAP Price-to-earnings (TTM) | 6.5 | 10.3 | 9.4 | 7.2 | 6.4 |
| GAAP Price-to-earnings (Forward) | 5.7 | 10.3 | 10.7 | 8.6 | 6.7 |
| EV-to-EBITDA | 3.2 | 5.4 | 5.6 | 3.6 | 3.5 |
| Total Debt to Equity % | 68 | 12.4 | 19.8 | 42.6 | 49.2 |
The above table provides us with some interesting comparisons, and on several fronts. It’s offers the most attractive dividends, has the lowest forward price-to-earnings ratio and EV-to-EBITDA.
However, this discount to its peers is perhaps reflective of its higher debt-to-equity ratio. BP has considerably more debt than its American peers, much of this still relates to the Deepwater Horizon oil spill.
Thus, the EV-to-EBITDA ratio is perhaps most telling. That’s because it takes into account the impact of short- and long-term debt and any cash on the company’s balance sheet.
As such, if I wanted exposure to the hydrocarbons sector, which I don’t currently have, BP would be top of my list. If an attractive entry point emerges, I may try to add the stock to my portfolio.
