BP’s (LSE: BP) share price has fallen around 18% from its 18 October 12-month traded high of £5.62. But this has largely tracked the decline in the oil price over that time.
However, such a drop signals to me that now might be a good time to add to my holding in the company.
Very undervalued
BP now trades on the key price-to-earnings (P/E) stock valuation measurement at just 10.4. This is very cheap compared to its peer group’s average of 14.
To ascertain how cheap, I used a discounted cash flow analysis incorporating several analysts’ figures and my own.
This shows BP to currently be about 43% undervalued at its present price of £4.63. Therefore, a fair value would be around £8.12.
There is no guarantee it will reach that price, but again underlines to me how big a bargain it looks.
One risk in the shares is that the oil price continues to trend down. Another is that government pressure to expedite its energy transition causes it to miss out on oil and gas revenues.
However, consensus analysts’ forecasts are that BP’s earnings per share will grow 10% a year to end-2026. Its return on equity is forecast to be 18.5% by that point.
A quickly changing market
The oil price changes constantly, mainly due to changes in supply and demand and shifting geopolitical risks.
It has been trending down recently, but this could well be set to change, in my view.
2 June saw oil cartel OPEC extending 3.66 million barrels per day (bpd) of production cuts to the end of 2025. Another 2.2 million bpd will be extended to the end of September 2024.
Together, these cuts comprise around 5.7% of global oil demand. Cuts in global supply are generally bullish for oil prices.
On the other side of the demand-supply equation, China’s economy appears to be growing solidly again. The world’s largest oil importer forecasts economic growth of “around 5%” this year and several major stimulus measures are ongoing.
Increased global demand is also generally bullish for oil prices.
Finally, geopolitical risk remains high. The Israel-Hamas War still threatens to widen across the key global oil-producing region of the Middle East. And international sanctions remain in place on leading world oil and gas producer Russia for its ongoing war in Ukraine.
Increased shareholder rewards
An additional boost to BP’s share price is likely to come from increased shareholder rewards, I think.
It reiterated its commitment to $3.5bn in share buybacks in H1 this year during its Q1 2024 results. 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 (5.17p) 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 £4.63 share price of 5.2%.
The present yield is 4.8%, based on the 2023 dividend of 28 cents.
Both compare very favourably to the average FTSE 100 payout of 3.8%.
Given its solid growth forecasts, undervaluation, and rising yield, I will be adding to my holding very soon.
