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BP’s (LSE: BP) share price is down 29% from its 12 April 12-month traded high of £5.40. To ascertain if this is a bargain-basement buying opportunity for me, I began by looking at the key price-to-book ratio (P/B) of stock valuation.
The UK oil and gas giant currently trades at just 1.2. This is second lowest (after Shell at 1.1) of its competitor group, which averages 2.3. The other members of this peer set comprise ExxonMobil and Chevron at 1.9, and Aramco at 4.5.
So BP looks undervalued on this measure. This applies even more to its price-to-sales (P/S) ratio of only 0.4. It is bottom of its peer group here, with the average being 1.8.
A discounted cash flow shows BP shares to be 49% undervalued at their current £3.84 price. So the fair value of the stock is £7.53, although market vagaries could push it lower or higher.
Is the business outlook good?
A risk for BP’s share price from here is that the oil price continues in its recent bearish trend. Another is that government pressure leads it to a reverse its more pragmatic approach to the energy transition.
My view is that oil prices will be a lot stronger for a lot longer than many think. This is primarily because the energy transition may not occur as quickly as commonly believed, in my view.
Donald Trump’s second term as US President will probably see a rise in oil and gas production, as he promised. And this would have a bearish effect on the prices of both.
However, he also promised to ease the approvals process for new oil and gas projects. This would allow firms such as BP to boost profits even at lower prices just by drilling more.
The firm appears to have the same idea. It plans to increase its US oil production to 1 million barrels per day (bpd) by the end of the decade, from 650,000 bpd last year.
And in August it signed a preliminary deal to develop oil fields in Iraq containing 20 billion barrels of reserves. The cost of removing a barrel of oil in Iraq is the joint lowest in the world — $1-$2 per barrel – alongside Iran and Saudi Arabia.
As it stands, consensus analysts’ estimates are that BP’s earnings will grow 28.5% a year to the end of 2026. And it is ultimately earnings growth that powers a firm’s share price and dividend higher.
So what about the dividend?
BP is getting to a point where it is becoming a genuinely valuable income stock as well, in my opinion. In 2023, it paid a dividend of 22.5p fixed sterling equivalent, which yields 5.9%. By contrast, the FTSE 100’s average yield is 3.6%.
Analysts forecast that this payout will rise to 24.6p in 2024, 26p in 2025, and 27.3p in 2026. These would give respective yields on the current share price of 6.6%, 6.8%, and 7.1%.
Given its high earnings growth prospects, strong dividend yield, and share price potential, BP is a must-buy opportunity for me. So I will be adding to my existing holding very soon indeed.
