BP (LSE: BP) shares have dropped 17% since October. Such a large drop – while the FTSE 100 stayed flat – strikes me as a rare opportunity to pick up cheap shares in the oil major.
Analysts at Barclays seem to think so. They put a 1000p price target on the stock while praising the firm’s “longevity”. That’s some serious upside from current levels. BP shares go for 464p as I write.
Part of the reason for the bullishness is the company’s excellent financials. BP boasts a 25% earnings yield at present. Compare that to competitors like Shell at 13.9% or ExxonMobil at 10.1%.
Big earnings can pay big dividends and a 4.05% yield is on offer too. It’s one that’s covered around six times by earnings. There’s tonnes of safety in the dividend and scope for it to rise in coming years as well.
It’s true that oil prices have been high, but BP simply looks the best buy in the sector. As another example, its price-to-earnings ratio of 4.0 is considerably lower than Shell at 7.2 or ExxonMobil at 9.9.
With the bull case in mind, that 17% drop sticks out like a sore thumb. What’s going on? Why did it drop so much given the numbers above? Are there big risks under the surface here?
A sore thumb
Well, Brent crude oil dropped from $90 a barrel to $75 a barrel this year. So BP’s share price fell, in part, because of a poorer earnings outlook. Shell was down 10% over the same period. But there’s more going on here.
The abrupt and acrinmonious departure of CEO Bernard Looney won’t have helped. Neither will missed expectations for Q3. Taking it altogether, perhaps there’s enough uncertainty here to put investors off.
I think the Q3 miss was magnified, though. BP’s volatile gas trading segment didn’t perform, but its oil and gas production – still the mainstay of the firm – actually beat estimates.
More widely, oil is naturally cyclical. Finding the bottom with these stocks can be lucrative. Anyone who picked up BP shares as oil went to zero during the pandemic would be sitting on over double their money right now.
Hang on a second though. Invest in oil? The black stuff? Isn’t this madness as the world careers towards a 2050 Net Zero target which will put firms like BP out to pasture?
New tech
Decarbonisation is, to be fair, the biggest risk here. The counter-agrument would be that oil firms are not stupid and they’re very keen to hedge their bets on the new and latest technology.
As if to emphasise this, last week BP acquired a majority stake in Europe’s largest solar developer, Lightsource, for £254m.
This is far from the only renewables acquisition BP has made and those analysts at Barclays make it an important part of that 1000p target, stating, “The message here is clear. This is not a business in decline.“
I don’t own shares in BP already, but I’m tempted by the cheap entry point. The stock will be going on my watchlist and I may open a position soon.
