BP Shares: To Buy or Not to Buy?

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BP (LON:BP) is one of the UK’s largest companies and one of a pair of oil majors that call the FTSE 100 home, BP shares may look cheap but should you buy BP shares at their current price?

Fossil fuel outlook

The future of fossil fuels has been at the top of the ESG agenda for some time, and whilst eco-warriors would like to consign them to history, the truth is that the modern world is still dependent on oil and gas, and will be for many years to come.

After all, you can’t just replace an infrastructure that was built up over more than a century, overnight.

That leaves investors with something of a dilemma, one that means many of us will be asking, should I buy BP Shares?

I don’t propose to look directly at the environmental issues here as I think the ESG question is one of personal choice. Instead let’s look at the business and investing case, for buying BP shares.

Currently trading at around 469p per share, BP sits on a trailing twelve-month PE of just 4.25 times and a 12-month forward PE ratio of 6.40.

Both of these figures are well below the multiples enjoyed by BP’s US peers. For example, Exxon Mobil (XOM ) trades on 9.40 and 10.65 times respectively.

UK rival Shell (LON:SHEL) sits on a trailing PE of 7.54 times and a forward PE of 7.34 times.

Valuation

There are a few numbers which suggest that BP is a cheap stock to own at the moment.

BP’s dividend currently yields 4.77% and has a very conservative 19.0% dividend payout ratio. That’s low for such a cash-generative business, by comparison, Shell has a payout ratio of 27.42% and a dividend yield of 4.23%.

I take that to mean that BP could pay a bigger dividend if it chose to. But at the same time that it’s garnering its cash resources, in what is still a capital-intensive sector, and one that might struggle to raise funding in future, if the climate lobby gets its way.

Looking at BP’s share price performance, at the time of writing, the shares were down by -1.00% year to date. Exxon and Chevron (CVX) have posted double-digit percentage losses this year, however, Shell’s share price has risen by +9.00% in 2023.

If we look at BP’s three-year share price performance we find that they are up +72.0%. That’s below the returns of +133.0%, delivered by Exxon, but above the +65.56% three-year stock gains of Chevron.

BP share price

BP need oil prices to rally

Oil prices have been under pressure of late, with supply appearing to outstrip demand, as investors wrestle with the idea of a possible recession in the US and Europe. Whilst a sluggish Chinese economy has failed to gain any real momentum, almost a year after emerging from lockdown.

A soft, rather than hard landing for the US economy, and any sign of lower interest rates in both Europe and the US, could be catalysts for oil prices, and therefore for the share prices of oil and gas stocks.

The one caveat, however, is that interest rates would need to be cut for the right reasons i.e. because inflation has been squeezed out of the system, rather than as a boost to a flagging economy.

BP as a takeover target

BP looks cheap and is trading on lower multiples than most other oil majors. We have already seen Exxon and Chevron make multi-billion dollar takeover bids in the sector, during the summer, buying Pioneer and Hess respectively.

Chevron spent $60.0 billion alone on Hess, BP’s current market cap is a good deal higher at £79.27 billion, but that’s just a fraction of the size of Saudi Aramco’s $2.10 trillion valuation. So we can never say never.

Probably the best indication of BP being a stock to buy would be a more buoyant Chinese economy, and or, a firmer stance on production cuts from OPEC and its allies. But for the moment at least neither of those things looks to be on the horizon.

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