Oil prices continue to soar. In recent hours, Brent Crude rocketed to seven-year highs, just below $89 per barrel, on fresh supply worries. This, combined with improving demand forecasts as the Omicron threat recedes, could continue to push black gold prices to the stars. Goldman Sachs now thinks a move through $100 is an inevitability.
It’s not a shock to see investor interest in FTSE 100 oil majors like BP (LSE: BP) take off as a consequence. BP’s share price has just popped through the 400p per share marker for the first time since February 2020.
Yet despite these recent gains, BP still seems to offer terrific value for money. A price-to-earnings (P/E) ratio of 7.6 times for 2022 sits well below the widely-regarded bargain benchmark of 10 times. Its dividend yield meanwhile comes in at a meaty 4.2%.
Why the oil price rally could end
I have serious reservations about investing in BP however. Energy prices are soaring today but fresh trouble in the battle against Covid-19 could send them tumbling again.
Let’s not forget the public health crisis is far from finished. Rocketing global inflation and China’s teetering real estate sector are additional threats to the economic recovery that could pull prices lower again.
On top of this, energy values could suffer a sharp turnaround if producers continue to hurriedly raise output. The number of US rigs in operation has risen in four of the last five weeks, according to Baker Hughes.
In fact the number of working oil and gas rigs last week rose at their fastest pace since April. It’s possible that oil prices could start reflecting speculation that declining stockpiles might begin to build strongly again.
The green revolution
As a long-term investor, I prefer to think about what a company’s share price will be doing in several years time. Unfortunately, in the case of BP, I think the spectre of massive oversupply looms dominates its outlook for the next 10 years.
Massive fossil fuel investment in recent years looks set to yield fruit sooner rather than later too. In the US, for example, the Energy Information Administration has tipped annual production to hit record highs of 12.4m barrels a day in 2023.
Huge spending by other major oil producers like Canada, Brazil and Norway also threatens to drown the market with excess oil.
In another worrying development, soaring investment in green technologies threatens to sink crude demand as the decade progresses. People are shunning gas-guzzling cars and buying electric vehicles at a jaw-dropping rate. At the same time, demand for renewable energy is rising sharply as concerns over the climate crisis worsen.
BP is taking steps to improve its own green credentials to address this long-term threat. This week, for instance, it signed a deal with Oman to explore building multiple gigawatts of electricity from wind, solar and green hydrogen projects by 2030. But BP’s exposure to low-carbon energy remains meagre and it has a long way (and a lot of money to spend) to catch up.
A better FTSE 100 stock to buy?
I believe Tesco (LSE: TSCO) could prove a better FTSE 100 share to buy than BP. Okay, its heyday of the early 2000s might be over, a time when £1 of every £8 spent in the UK found its way into the company’s tills.
But the business still sits at the top of the country’s grocery industry, has the clout and, thanks to its long-running Clubcard reward scheme, a large and loyal customer base to fall back on.
I also like Tesco because of the strength of its online offering. It has the best delivery operation in the business and vast investment here since the beginning of the pandemic has boosted its strength.
This puts Tesco in great shape to exploit the fast-growing online grocery segment. Analysts at IGD think this segment could be worth £26.9bn by 2026, up £4.7bn from last year’s levels.
Rising competition
That said, Tesco also faces significant problems of its own. Supply chain problems for example threaten to remain a long-term problem as post-Brexit customs changes come into effect. A smaller pool of workers to draw on due to tightening immigration rules also threatens to drive up costs and cause disruption.
My main fear for Tesco however, comes as its competitors expand rapidly to grab its customers. All of its established rivals including Sainsbury’s and Morrisons now operate sophisticated online operations of their own. US retail giant Amazon has also dipped its toe in the water in the UK, and German discounter Aldi now operates a ‘click and collect’ service of its own.
The danger posed by Aldi and its German counterpart Lidl are particularly concerning to me. Their rapid store rollouts come at a time when value is becoming increasingly important to British consumers.
IGD expects discounts to be the fastest-growing part of the grocery market in the years ahead. They think it’ll be worth £34.4bn by 2026, up £6.6bn from 2021. News that inflation in the UK has hit 30-year highs could hasten the flow from Tesco to these low-cost retailers too.
Should I buy Tesco shares?
Just like BP, Tesco’s share price also seems to offer excellent value on paper. The retailer trades on a forward price-to-earnings growth (PEG) ratio of 0.2, comfortably below the watermark of 1 that suggests a stock could be undervalued. However, this low valuation reflects the colossal (and growing) long-term threats to Tesco’s profits.
There are plenty of other cheap UK and US for me to choose from today. So I won’t be taking a risk by buying Tesco or BP.
