BP’s (LSE: BP) share price has dropped 17% from its 8 March 12-month high of £5.64. However, such a drop does not automatically mean that a stock is undervalued. It may simply be that the company is worth less than it was before.
To see if this is true for BP, I looked at two key factors. First, its share valuation against those of its peers. Second, how well positioned its business looks for further growth.
Shares undervalued relative to peers?
On the key price-to-earnings (P/E) stock measurement, BP currently trades at 6.6 against a peer group average of 11.1.
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This group comprises one that’s lower — Petrobras at 4.1 — plus Shell at 10.6, Chevron at 13.6, and Saudi Arabian Oil at 16.3.
Therefore, on this key metric, there looks to be considerable value in BP’s shares.
Business well-positioned for growth?
BP is at the forefront of the transition away from fossil fuels and towards renewable energy. And interim CEO Murray Auchinloss has indicated that this will continue to be done in a balanced way.
On the one hand, he said after the 6 February Q4 2023 results announcement that BP remains committed to reducing oil production by 25% from 2019 levels by 2030.
On the other, he added, the firm might increase its oil output to end-2027 by more than the 3% target for the 2022-2027 period.
He also said that BP will increase its liquefied natural gas portfolio by 9% by the end of 2025.
Its ability to invest in both fossil fuels and renewable energy development is boosted by its high return on capital employed (ROCE). At around 24%, BP’s is more than double the oil and gas industry average of about 11%.
This will be crucial, as the energy transition will take much longer than many analysts think, in my view.
December 2023’s UN Climate Change Conference said that 2050 remains a net zero emissions target. But it added that this must nevertheless be done “in keeping with the science”.
For me, pressure from governments to speed up BP’s move to renewables is one risk in the stock. This could mean it misses out on continued fossil fuel opportunities. It could also mean that it rolls out energy transition processes that have not been fully tested in the field.
A sustained commodities price slump remains another risk, as its major revenue streams still come from oil and gas sales.
Overall, in its Q4 2023 results, BP posted an underlying replacement cost profit (net income) of $2.99bn. This exceeded consensus analysts’ forecasts of $2.77bn.
What’s in it for shareholders?
I already hold shares in BP, but if I did not I would buy the stock today for two key reasons.
First, the shares look undervalued to me compared to their peers. This means to me that they may gradually converge in value towards their competitors, giving me price gains.
Added impetus for these gains may come from the huge share buybacks planned by the firm, in my view. $3.5bn of buybacks will occur in H1 this year and a total of $14bn by the end of 2025. Buybacks are seen as bullish for stock prices.
Second, the stock offers a reasonable dividend too – around 4.6% currently. This compares favourably to the present FTSE 100 average of 3.9%.
