The BP (LSE: BP) share price has been a challenging investment to own over the past 12 months. Between the beginning of January and the end of March last year, the stock dropped around 50% as the oil price plunged to a multi-decade low.
This made sense at the time. As one of the world’s largest oil producers, BP needs high oil prices to earn a return on its investments. As the price collapsed, the company’s profits evaporated.
But then, as the price of oil started to recover in the second half of 2020, the BP share price continued to decline. It fell a further 35% between the end of March and the beginning of November 2020. During this time, the price of a barrel of oil increased by around 40%.
Overall, between the end of 2019 and the beginning of November 2020, the stock lost more than 60%, excluding dividends. At its nadir, the BP share price was changing hands at just under 200p. The last time it hit this level was in the middle of 1994.
Since the beginning of November, the stock has started to reflect the rising oil price. It’s up 63% from the lows. Over the past year as a whole, the stock has added just a 0.2%.
I think there could be further gains to come. In my opinion, the BP share price has become disconnected from the company’s underlying fundamentals.
BP share price fundamentals
Today, the shares are worth as much as they were in the second quarter of last year, a time when the world was facing significant economic uncertainty.
As demand dwindled, the price of oil stabilised at around $40 a barrel. Since then, the price of oil has galloped higher. It’s currently trading at around $70 as the outlook for the global economy has improved.
As the price of oil has recovered, so have BP’s profits. Group operating profit for the first quarter was $4.7bn, up from -$4.4bn last year. This cash infusion and asset sales helped the company reduce overall net debt in the period by $5.6bn to $33.3bn.
The more robust balance sheet gave management confidence to restart the group’s share repurchase plan, with $500m of buybacks set to take place in the second quarter.
An opportunity
All of the above seems to suggest to me that the market hasn’t yet fully priced in the company’s recovery. Operating profit is significantly higher than it was this time last year, but the stock price is only 0.2% higher.
Of course, that’s not to say the firm is out of the woods just yet. The pandemic isn’t over, and a third wave in Europe could send the price of oil plunging once again.
What’s more, the company is facing increasing pressure to spend more on renewable energy and divest oil and gas assets. This transition could reduce profits and lead to increased borrowings as the group invests in green energy.
Still, despite these risks and challenges, I think the market is underappreciating the potential of the BP share price. That’s why I’d buy the stock for my portfolio today.
