Earlier this year, BP (LSE:BP.) shares were trading comfortably above £5. Yet over the last six months, the energy giant’s seen its valuation get slashed, falling by almost 25%. And it’s not the only company that’s seemingly been caught in the crossfire.
Shell‘s also been a sell-off target, and now both FTSE 100 stocks are trading at relatively cheap-looking price-to-earnings ratios. What’s going on? And when will the BP share price return to its former £5 a share status?
Why did the share price tumble?
There are a lot of factors influencing the valuations of energy stocks. The most apparent is the price of oil and natural gas that companies like BP are known to produce. Like any commodity-driven enterprise, the company has little control over the price of its products, and weakness within the price forecasts for oil & gas is undoubtedly a significant contributor to the stock’s lacklustre performance.
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To add fuel to the fire, ExxonMobil published a report in August that outlined its long-term expectations for global oil demand. The trend was clear that demand is expected to flatline by 2050. This isn’t entirely surprising as nations around the world have pledged to transition towards renewables.
Pairing this with the simultaneous rise of unfavourable windfall taxes and government policy has sparked a lot of conservatism among both businesses and investors alike. Pairing that with higher interest rates and a pretty lofty debt balance, it’s not too surprising to see the markets grow pessimistic about this enterprise.
The journey back to £5 a share
While there are some valid concerns surrounding this business, I can’t help but wonder if investors have gone a bit over the top with all the selling.
Not every City analyst is rating BP shares as a Buy. Yet even the most pessimistic share price forecast as of September indicates an 8% upside by this time next year. At the same, the most bullish forecasts suggest that shares of this energy business could reach as high as 658.31p, with an average consensus of 536.40p.
In other words, there’s a seemingly good chance of the BP share price climbing back above the £5 threshold within the next 12 months. Obviously, there’s no guarantees since forecasts are notoriously inaccurate. However, with management ramping up a new project in the Gulf of Mexico to support short-term growth, a price-to-earnings ratio of just 12.5 does look like it’s a bit on the cheap side.
As for the group’s long-term trajectory, BP’s already investing in renewable projects with 59 gigawatts of capacity currently in development. However, there’s still a question of how profitable BP can be once its oil & gas assets are a thing of the past. This likely won’t become a reality for another two decades, but it’s a growing question that’s yet to be answered.
