Energy giant BP’s (LSE: BP) share price is down 15% from its 18 October 12-month high.
Part of this comes from oil prices falling from around $92 per barrel (pb) to about $82 pb now. This weakening in oil prices may not persist, in my view.
The other part I think comes from a misconception about how fast the energy transition will happen, and which firms will benefit.
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Oil prices trending higher
While oil prices are down 11% since 18 October, they have been trending back up again since mid-December.
There are two key reasons for this rise, both of which point to even higher prices to come, in my view.
Firstly, the OPEC+ oil cartel pledged in December to cut 2.2m barrels per day (bpd) in supply to the end of Q1. That brought the total agreed cuts to 5.86m bpd – around 6% of global daily demand. Cuts in oil supply tend to boost prices.
On 3 March, several key members of OPEC+ decided to extend these cuts to the end of Q2 at least.
Secondly, oil demand is set to increase. This also tends to push oil prices higher.
The International Energy Agency predicts that global oil demand will jump by 1.24m bpd this year. OPEC+ forecasts that it will rise by 2.25m bpd over the period.
As ever in the global energy markets, there is also the unpredictable to consider. Much as we hope it will not, the Israel-Hamas War may still escalate.
Such a “large disruption in oil supply” could push oil prices to $157 a barrel, according to the World Bank.
Common energy transition misconception
Evidence now points to the energy transition taking a lot longer than previously thought, in my view.
At December 2023’s UN Climate Change Conference the final statement did not include anything about completely phasing out fossil fuels.
It also said that although net zero emissions remains the target for 2050, this must be done “in keeping with the science”.
Also overlooked I think is that energy companies, such as BP, will be at the centre of this change.
Given these factors, BP is maintaining a balance between fossil and non-fossil fuels production.
It is committed to reducing oil production by 25% from 2019 levels by 2030.
But it has also said it may increase oil output to end-2027 by more than its previous target. It will also increase its liquefied natural gas portfolio by 9% by the end of 2025.
Undervalued against its peers?
BP currently trades at a price-to-earnings (P/E) measurement of just 6.6 – the lowest in its peer group, which averages 12.9.
A discounted cash flow analysis shows the stock to be around 47% undervalued at its present price of £4.79. So a fair value would be around £9.04, although it may never reach that price, of course.
This could be boosted by $3.5bn in share buybacks planned in H1 this year.
Positive for me as well is that the company is currently paying a 4.6% dividend. This compares to the FTSE 100 average of 3.9%.
For its solid dividend, potential price gains, and well-positioned energy transition strategy I am looking to add to my holding in BP soon.
