Blood pressureThe share price of (LSE: BP) has lost around 14% of its value since its 12-month high of £5.62 on October 18.
Part of the decline is due to the fall in oil prices during this period, but a larger part, in my view, results from the group’s much stronger focus on renewable energy than its main competitors.
These projects often require enormous investments over many years before any profit can be seen.
In addition, BP’s focus on these areas has led many investors to believe that the company is missing out on lucrative oil and gas opportunities. Oil prices are still at historically high levels following the Russian invasion of Ukraine in 2022.
Relative valuation gap
As a result, BP’s share price has plummeted compared to its main competitors with a less aggressive green energy program.
The stock’s price-earnings ratio (P/E) is only 10.8. The average P/E ratio of its main competitors is 14.1, so on this basis the stock is cheap.
Reorientation towards oil and gas production
Crucially, however, according to reports last week, BP has shifted its focus back to oil and gas production.
Expensive new offshore wind power projects that would only generate profits after years have been put on hold.
And it prioritizes investments in and potential acquisitions of oil and gas assets, including providing more capital to develop new sites in the promising fields in the Gulf of Mexico.
However, the company will continue to look for opportunities to generate low-carbon energy, provided they offer short-term profits.
One risk for the stock is possible pressure from the government to refocus its efforts on the energy transition. Another risk is that the currently optimistic demand-supply forecast on the oil market is reversed.
What will happen next with the shares?
SleeveUntil recently, the valuation of was also significantly behind that of its competitors.
However, the company’s shares have recovered since it rolled back some of its energy transition milestones. In my view, there is still further upside potential, but the trend looks optimistic.
I think the same thing could happen to BP. Since the company’s renewed focus on oil and gas was announced, its shares have increased in value.
However, a discounted cash flow shows that the stock is still undervalued by around 43% at £4.82. A fair value would therefore be around £8.46.
This does not necessarily mean that this price will be reached, but for me it underlines the extent of possible price gains.
Shareholder bonuses increased
In my opinion, an additional stimulus will come from higher shareholder premiums.
BP has reaffirmed its commitment to buyback shares worth $3.5 billion in the first half of this year.
This is part of the plan to buy back at least $14 billion worth of shares by the end of 2025. Buybacks usually have a very price-supporting effect.
The company also increased its first interim dividend by 10% from 6.61 cents (5.17 pence) per share to 7.27 cents.
If this were applied to the entire dividend for 2024, the payout would be 30.8 cents, which equates to a yield of 5%. This is very cheap compared to the average FTSE100 Distribution of 3.6%.
Given the refocus on oil and gas, the undervaluation and the increasing yield, I will be increasing my holding very soon.
The post “Can BP’s refocus on oil and gas production boost its share price?” first appeared on The Motley Fool UK.
Further reading
Simon Watkins holds positions in Bp Plc and Shell Plc. The Motley Fool UK does not hold any of the stocks mentioned. The views expressed in this article on the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
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