BP’s (LSE: BP) share price has fallen 13% from its 18 October traded high of £5.62.
Given this fall, it currently trades on the key price-to-earnings (P/E) stock valuation measurement at 11.
This looks cheap compared to its peer group, the average P/E of which is 14.6. This comprises Shell at 12.6, ExxonMobil at 14.4, Chevron at 14.8, and Saudi Arabian Oil at 16.4.
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But how cheap in cash terms? It appears to be around 40% undervalued at its present price of £4.90, according to a discounted cash flow analysis.
Therefore, a fair value would be around £8.17, although there is no guarantee it will ever reach that price.
However, it underlines to me that it looks to be one of the best bargains in the FTSE 100.
Core business strength
Shares do not stay undervalued like this over the long term if their fundamentals look good, in my experience.
Q1 2024’s results showed an underlying replacement cost profit of $2.7bn, against $3bn the previous quarter. This drop principally reflected lower oil and gas prices in the markets over the period and lower refining margins.
As it stands, consensus analysts’ estimates are that BP’s earnings per share will grow by 10% a year to end-2026. Return on equity is forecast to be 18.5% by that time.
Market outlook
Oil prices are fundamentally supported over the medium-to-long-term by demand outstripping supply, in my view.
OPEC sees demand increasing to 116m barrels per day (bpd) by 2045. This year, it is expected to average 103m bpd.
The International Energy Agency estimates that underinvestment could lead to oil supplies falling below 95m bpd as early as 2030.
One risk in the shares is that this mismatch in supply and demand does not occur. Another is that government pressure to expedite its energy transition causes it to miss out on oil and gas revenues.
However, after the 2023 results, CEO Murray Auchinloss pledged to turn BP into a “higher-value company”.
A core part of this is to “pragmatically adapt” to changes in energy demand, including through the energy transition.
Increasing shareholder rewards
Additional boosts to BP’s share price are likely to come from increased shareholder rewards, in my view.
In its Q1 2024 results, it reiterated its commitment to $3.5bn in share buybacks in H1 this year. This is part of its plan to repurchase at least $14bn in shares over this year and 2025. Buybacks tend to be very supportive of prices.
It also increased its first interim dividend by 10% — from 6.61 cents (5.22p) a share to 7.27 cents. If this were applied to the total 2024 dividend, the payout would be 30.8 cents. This would give a yield on the current £4.90 share price of 4.9%.
The present yield is 4.5%, based on the 2023 dividend of 28 cents.
Both compare very favourably to the average FTSE 100 payout of 3.8%.
I already have a big holding in BP and am happy with that. If I did not have it, I would buy the share today for its increasingly good yield, its apparent undervaluation, and its solid growth prospects.
