BP’s (LSE: BP) share price is down 28% from its 18 October 12-month traded high of £5.62. It has broadly followed the benchmark Brent oil price over that time.
This encapsulates to me why commodity sector shares can offer rare bargain opportunities for long-term investors.
Short-termism weighs on commodity prices
Specifically, oil prices are frequently driven by data indicating short-term imbalances in supply and demand.
It could be the US’s weekly reports showing declines in its oil inventory supplies, for example. Or it could be weak economic figures coming from China, flagging possible lower oil demand ahead.
Energy traders must react to such numbers every day, and this influences the share prices of oil firms.
But long-term investors need to appreciate that these are transitory factors at play.
Staying future-focused
The long-term prospects for oil prices often bear little relation to these current fluctuations. Consequently, if one believes that the future outlook for oil is more bullish than many think, then buying opportunities appear.
I feel, for instance, that the transition from fossil fuels to cleaner energy will take much longer than previously envisaged.
At December 2023’s UN Climate Change Conference, it was reiterated that net zero is still targeted to occur by 2050. Crucially, however, it was also stressed that this must be done “in keeping with the science”.
Oil cartel OPEC highlights that oil and gas still comprise 80% of the world’s current energy mix. It forecasts that oil demand will rise to 116m barrels per day (bpd) by 2045 from around 103m bpd now.
On 26 August, ExxonMobil stated that electric vehicles will also not significantly alter long-term global oil demand. It underlined that the 2bn projected rise in the world’s population by 2050 will necessitate a still heavy reliance on fossil fuels.
A more realistic approach
Murray Auchinloss promised a more pragmatic energy transition approach for BP when he became CEO.
One part of this involves pausing some expensive long-term energy transition projects that will not see returns for many years.
Last October, BP said it had 18bn barrels of oil and gas equivalent, representing 20 years of current production.
To boost this, it said in July that it will develop its Gulf of Mexico assets, containing around 10bn barrels of oil. And in August, it signed a preliminary deal in Iraq to develop four fields with around 9bn barrels of recoverable oil.
Will I buy more?
A key risk to BP’s prospects in my view is government pressure to revert to a speedier energy transition plans.
However, I will buy more of the stock soon for four reasons.
First, Auchinloss’s new pragmatic strategy for the business.
Second, analysts’ forecasts of earnings growth for the firm of 9.8% a year to end-2026.
Third, the shares’ cheap 11.9 price-to-earnings ratio valuation compared to the 14.1 average of its peer group.
And fourth, the 5.4% yield it currently offers, and analysts’ projections that this will rise to 6.3% next year and 6.6% in 2026. The present average yield on the FTSE 100, by contrast, is 3.6%.
