Is BP a Good Stock to Buy? Oil major BP (NYSE:BP) has experienced a year marked by significant volatility. The company took a loss valued at nearly $25 billion in early 2022 when it disengaged from the Russian market and has been struggling to mount a comeback ever since.
Today, though, high oil prices and surging demand for fuel could make BP an undervalued bargain.
Did BP Make A Big Strategic Mistake?
BP is currently attempting to recover from a period marked by difficult business conditions. The company generated $8.3 billion in cash flow in Q3. Underlying replacement cost profit did fall from $8.5 billion in Q2 to $8.2 billion in Q3. This decline was largely attributed to lower margins.
Due mostly to the disruption caused by the loss of its Russian business, however, BP has seen its profitability turn sharply negative in the past year. Q3 saw a loss of $2.2 billion, compared to positive earnings of $9.3 billion a year earlier.
Despite these challenges, BP still seems to have a decent amount of potential for growth going forward. One of the key drivers of this growth could be the planned acquisition of Archaea energy.
This renewable natural gas producer could give BP a robust competitive advantage in supplying biofuels to the US market. Archaea already operates 50 production facilities in the United States and could expand dramatically over the next several years with capital input from BP.
Although BP could see a decent amount of growth long-term, the next few years are expected to be somewhat difficult for the company. BP is expected to contract by 25.3 percent over the coming year.
On a 5-year horizon, BP is expected to see negative compounded growth of 4 percent annually. This projection makes BP much more suitable as a long-term play than as a short-term holding.
BP Is A Value Play
For the coming 12 months, analysts have a moderately positive view on BP. The stock is projected to rise from its current price of $35.56 to a fair market value price of $39, gaining 9.7 percent. The consensus rating on BP is a buy, though a large minority of the analysts covering the stock rate it as a hold.
With a P/E ratio of 5.4 and a price-to-sales ratio of 0.48, BP is undoubtedly a value play. The stock also trades at a ratio of 0.91 to expected earnings growth, further supporting the idea that it is undervalued.
BP’s debt load currently stands at 58 percent of equity, and it has reduced its net debt for the past 10 consecutive quarters.
Although the company’s dividend was interrupted during the pandemic, BP has returned to its program of quarterly payouts. The stock yields 3.99 percent and pays $1.42 per share annually. Over the next three years, management is projected to raise BP’s dividend at a compounded rate of 3.04 percent annually.
Falling Earnings a Serious Concern
BP’s largest risk factor is likely its continued trend of contracting earnings. While this is expected to reverse itself in the relatively near future, there’s no guarantee that the company will return to profitability on a rapid timeline. Further losses could push the time horizon for a recovery out, requiring higher eventual returns to compensate investors.
Like other oil and gas companies, BP is also exposed to political and regulatory risks. In recent years, the oil industry has come under increasing regulatory pressure as Western nations attempt to address climate change. While any action that reduces oil consumption will affect the industry as a whole and not BP as an individual company, investors should be aware of these risks before taking long-term positions on oil majors.
Finally, BP could struggle to succeed as a result of fierce competition within its industry. Having lost its Russian production market, BP must now adjust its supply chains to meet global demand.
Competitors from Chevron and Exxon may already be ahead of BP on this front, introducing additional competitive pressures.
Is BP a Good Stock to Buy?
BP stock is a mix of both positives and negatives, though it certainly has potential. If the company can continue paring its debts and moving closer to profitability in 2023, there’s a good chance that the stock will produce acceptable total returns.
In spite of its losses, BP is still turning in good results that will likely allow it to achieve profitability again in the relatively near future. The company’s return on assets is over 9 percent, while its return on equity is over 30 percent. Assuming market conditions improve, these metrics seem to suggest that BP’s execution is solid enough for it to mount a recovery.
BP is also pursuing an aggressive share buyback program that will likely support higher share prices while concentrating ownership. In 2022, the company committed to a yearly total buyback of $8.5 billion worth of its own stock.
The acquisition of Archaea also offers BP a new direction in which to grow. While oil and natural gas will remain relevant parts of the global energy mix for years to come, demand for more renewable and eco-friendly fuels is rising rapidly.
With a foothold in the American biofuel market, BP may be able to secure an economic moat as legacy energy companies transition toward greener alternatives.
On the downside, BP is struggling to generate positive earnings at a time when other oil majors are thriving. High crude oil prices have supported the industry and will likely continue to do so for some time. As such, the company is probably a higher risk than many of its competitors.
Overall, BP could be a decent buy for conservative investors with a long time horizon. While other oil and gas companies will likely outperform BP in the short-term, the company has solid long-term prospects.
Share buybacks, a high dividend and a normalization of earnings could help investors ride out the waiting period. While this stock may not be the right fit for every portfolio, it appears to be a moderate buy that could offer long-term returns in the energy sector.
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