BP (LSE: BP) shares have slumped this week. At the time of writing, they’re down just under 7% in the last five days. This has reversed the momentum BP stock had enjoyed throughout most of this year, with the shares now up just 2% in the last 12 months.
Whenever I see a substantial share price drop, I also see an opportunity to grab some cheap shares. However, before I decide whether to add this stock to my portfolio, I’m going to take a closer look at why the shares have fallen, and whether they could rise again in the future.
Poor results
In its Q3 2023 results, BP reported profits of $3.3bn, falling well short of its $4bn forecasts. This decline was a notable contrast from the same period in 2022, when BP enjoyed over $8bn in profits due to skyrocketing oil prices driven by Russia’s invasion of Ukraine. BP announced that the primary driver behind the fall in profits was “weak gas marketing and trading results”.
Despite this setback, analysts at UBS maintained their buy recommendation and target price of 640p. They highlighted that the subpar returns in gas trading had somewhat obscured the company’s underlying operational progress, which included year-on-year increases in cash flow and a reduction in net debt.
In addition to this, the company reported the completion of its previously announced $1.5bn share buyback programme. It also announced another series of buybacks of the same size in the next three months, both of which are good news for shareholders.
Therefore, while the shares may have slumped on the news, I see a lot of positives coming out of these results.
Wider market sentiment
Oil prices have risen steadily throughout the course of this year, which is good news for BP as higher oil prices translates into rising revenues. The primary driver behind this has been the announcement that Saudi Arabia and Russia would be prolonging voluntary production and export cuts until the end of 2023, vastly reducing global supply levels.
This being said, the longer-term outlook for BP still slightly concerns me. As the world moves to green energy, the oil giant will need to reinvent itself. The recent resignation of CEO Bernard Looney has exacerbated this situation, as he’d laid out multiple growth plans to take the company to net zero by 2050.
I see value here
Another draw of BP stock is its current low valuation. Trading at a price to earnings (P/E) ratio of just 4.2, BP is well below the FTSE 100 average. For context, this means investors value the stock at roughly 4 times its earnings per share. Comparing it to close competitors like Shell and TotalEnergies, which have P/E ratios of 8.3 and 8.7 respectively, I also see value.
Furthermore, BP offers a generous dividend yield of 4.6%, above the FTSE 100 average. This is a great way I could add some extra passive income to my portfolio.
Overall, I think that the recent drop in BP’s share price could present a great buying opportunity for me. Although BP’s headline results were disappointing, I actually see a lot of positives. This coupled with the cheap valuation and healthy dividend excites me. If I had some spare cash lying around I would be looking to buy some shares now.
