With three new value-boosting strategies in place, BP’s share price looks a bargain to me

BP’s
(LSE:
BP)
share
price
has
dropped
around
9%
from
its
12-month
18
October
high.

Part
of
this
fall
is
linked
to
a
similar
decline
in
oil
prices
over
the
period.
But
the
other
part
reflects
a
persistent
undervaluation
due
to
its
energy
transition
strategy
compared
to
some
of
its
rivals.

However,
this
may
be
about
to
change,
in
my
view.

Eco
strategy
under
scrutiny

BP
has
pledged
to
achieve
net
zero
carbon
emissions
by
2050
–
in
line
with
the
UK’s
energy
transition
strategy.

To
the
markets,
this
means
that
BP
is
spending
enormous
sums
of
money
on
green
technology
with
little
immediate
financial
return.
It
also
means
that
it
is
losing
out
on
a
mini-boom
in
oil
and
gas
prices.

Worse
still,
as
far
as
the
markets
are
concerned,
is
that
the
energy
transition
may
take
a
lot
longer
than
previously
thought.

2023’s
UN
Climate
Change
Conference
final
statement
said
that
net
zero
emissions
remain
the
target
for
2050.
But
it
added
that
this
must
be
done “in
keeping
with
the
science”.

Undervalued
against
its
peers

Given
this,
BP
now
trades
on
the
key

price-to-earnings (P/E)
stock
valuation
measurement
at
just
7.

The
average
P/E
of
its
peer
group
companies
that
continue
to
focus
on
fossil
fuel
production
is
14.6.
So,
it
looks
a
bargain
on
this
basis.

This
was
despite
it
posting
$13.8bn
underlying
replacement
cost
profit
(that
is,
net
income)
in
2023.
And
Q4’s
$2.99bn
exceeded
consensus
analysts’
forecasts
of
$2.77bn.

But
how
cheap
is
it
in
cash
terms?
A discounted
cash
flow analysis
shows
it
to
be
around
40%
undervalued
at
its
present
price
of
£5.10.

Therefore,
a
fair
value
would
be
around
£8.50,
although
there
is
no
guarantee
it
will
ever
reach
that
price.

Where’s
the
next
price
leap
coming
from?

One risk
for
BP
is
that
oil
market
supply
and
demand
dynamics
switch
around,
causing
prices
to
fall.
Another
is
government
pressure
to
expedite
its
energy
transition
strategy.

However,
after
the
2023
results,
CEO
Murray
Auchinloss
pledged
to
turn
BP
into
a

“higher
value
company”.

A
core
part
of
this
is
to

“pragmatically
adapt”
to
changes
in
energy
demand,
including
through
the
energy
transition.

So,
it
said
it
may
increase
oil
output
to
the
end
of
2027
by
more
than
previously
stated.
It
will
also
increase
its
liquefied
natural
gas
portfolio
by
9%
by
the
end
of
2025.

In
my
view,
it
may
well
extend
these
increases
beyond
those
years.
This
will
still
allow
it
to
meet
its
2050
net
zero
carbon
emissions
target
for
oil
and
gas
production.

Another
key
element
to
making
it
a
higher-value
company
is
increasing
its
dividend.
It
did
this
during
its
2023
results
announcement
—
by
17%,
to
28
cents
(22p)
from
24
cents.
It
now
yields
4.3%,
which
compares
favourably
to
the
current FTSE
100 average
of
3.8%.

A
final
part
of
this
value-boosting
strategy
for
shareholders
is
to
implement
huge
share
buybacks.
It
intends
to
repurchase
at
least
$14bn
in
stock
over
this
year
and
2025.

Given
my
view
that
these
three
measures
are
likely
to
boost
an
already
very
undervalued
stock
price,
I
am
very
happy
to
add
to
my
existing
holding
in
BP.