BP’s (LSE: BP) share price has been steadily rising along with oil prices since the middle of January.
Despite this, it still looks extremely undervalued compared to other oil giants, which is why I’m buying more of it now.
Another is its healthy main business.
Strong core business
In 2023, BP posted $13.8bn underlying replacement cost profit (net income), with Q4’s $2.99bn exceeding consensus analysts’ forecasts of $2.77bn.
These bumper profits came in a year that was much worse for oil than 2022. The benchmark Brent oil price slid 18% to an average $82.49 in 2023 from $100.93 the year before.
The performance came partly from strong gas marketing and trading. It also resulted from improved oil sales deals, and from lower refining margins that reduced costs for the firm.
These results enabled BP to increase its dividend by 17% — to 28 cents (23p) from 24 cents. It’s now yielding 4.4%, which compares favourably to the current FTSE 100 average of 3.8%.
More balanced energy transition strategy
Like UK peer Shell, BP has seen its valuation far outstripped by fossil-fuel-focused US rivals.
So CEO Murray Auchinloss has said BP will be more pragmatic in its energy transition than it had previously been.
On the one hand, it remains committed to reducing oil production by 25% from 2019 levels by 2030.
But on the other, it may increase oil output to end-2027 by more than its previous target. Oil cartel OPEC sees demand increasing to 116m barrels per day (bpd) by 2045. This year, it’s expected to average 103m bpd.
BP will also increase its liquefied natural gas (LNG) portfolio by 9% by the end of 2025. Industry forecasts are that LNG demand will rise over 50% by 2040.
This aligns with 2023’s UN Climate Change Conference final statement — it said nothing about completely phasing out fossil fuels.
It also said that net zero emissions remain the target for 2050, but it must be done “in keeping with the science”.
A risk for BP is that government pressure causes it to speed up its energy transition strategy again. This could mean it misses out on continued fossil fuel opportunities, and its valuation deteriorates further against fossil-fuel-focused rivals.
Another risk is that the energy market reverses into a sustained period of lower prices.
What about valuation?
Just because BP’s share price has risen since January, doesn’t mean there’s no value left in the stock.
It could simply mean that the company’s worth more now than it was before. In fact, it could be that the firm is worth even more than the elevated share price implies.
In BP’s case, even after the price rise, it trades on the key price-to-earnings (P/E) stock valuation measurement at 7.1.
This is around half the average P/E of its peer group – which is 13.9. So, it looks very cheap on this basis.
But how much exactly in cash terms? A discounted cash flow analysis shows the stock to be around 47% undervalued at its present price of £5.15. Therefore, a fair value would be around £9.72.
This doesn’t guarantee it will ever reach that price, of course. But it does confirm to me that there’s a lot of value left in the stock.
