Are BP shares undervalued? Here’s what the charts say!

The fluctuation of BP shares is highly correlated to the price of energy. But the stock trades at a discount to its supermajor peers. So, why is this?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Asian man drinking coffee at home and looking at his phone

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BP (LSE:BP) shares have remained relatively flat this summer, with a buyback policy making up for an earnings disappointment. In terms of performance, BP has largely been performing in line with other oil supermajors. However, its valuation indicates a significant discount. Let’s explore.

Performance

BP reported a significant earnings miss on August 1. Profit for the quarter came in at £1.8bn, down from $8.2bn in the first quarter. The earnings per share followed suit, experiencing a notable descent from $27.74 to $14.77.

However, this wasn’t hugely surprising. BP was the last of the supermajors to report earnings. ExxonMobil and Shell noted profits falling by 56%, while TotalEnergies said earnings fell by 49%.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Falling earnings across the sector reflected softening demand for hydrocarbons products and narrowing margins across the value chain. During the quarter oil prices fell 10% and natural gas prices by almost 30%.

Of course, this highlights a risk of investing in BP, as well as its peers. And if the environment deteriorates, and energy prices fall, the stocks could tumble.

Dividends and buybacks

In its recent earnings report, BP announced a plan to repurchase $1.5bn worth of shares before the Q3 results announcement later this year. This amounts to about 1.4% of the shares that were available at the time of the announcement. Notably, BP has reduced the number of its shares by 8.4% over the past 10 years, a pivotal aspect of its investment strategy.

BP’s dividend yield stands at 4.12%, which is higher than the average for the index. This dividend is also quite dependable. The company has only cut it twice in the last 15 years. The first time was after the Deepwater Horizon oil spill, when BP had to pay fines. The second time was during the pandemic. Additionally, its coverage ratio is 4.24 times, indicating that, based on previous earnings at least, the dividend seems sustainable.

Valuation

BP has historically had the lowest gross profit margin of the supermajors, standing at 30.7% at the end of Q1. This may not be the case for long, however. BP highlighted in its Q2 report that the acquisition of TravelCenters of America – a deal that will add a network of 288 sites located on US highways – should almost double its global convenience gross margin.

However, more importantly, when we look at valuation metrics, BP retains a significant discount. At present, BP’s P/E stands at 5.9, with a forward P/E of 6.5 based on projected earnings for the year.

As we can see in the chart below, this represents a significant discount versus peers. It’s also a discount versus BP’s five-year average P/E of 8.3.

Created at TradingView

We can see that Shell is the closest company by valuation, and this highlights the discount afforded to UK stocks. But we also know that debt is another reason for the relatively low valuation.

BP’s debt-to-equity ratio is around 0.59 – Exxon 0.2, Chevron 0.14, and Shell 0.44. In turn this is a drag on profitably. However, it’s evident that this does not fully account for the discount. As such, BP appears undervalued.

5 stocks for trying to build wealth after 50

Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Dividend investors! Here’s what Warren Buffett says builds wealth in the stock market

Reinvesting dividends at yields of 8% or higher looks like a good way of building wealth. But Warren Buffett has…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s my Stocks and Shares ISA plan for 2025-26

A Stocks and Shares ISA helps investors avoid taxes on dividends and capital gains. And Stephen Wright has a plan…

Read more »

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »