1 Oil Stock Trading at Low PE Ratio

In mid-December, Crude Oil futures peeked above a downtrending resistance line that had formed throughout much of 2023. If oil prices are to return to higher levels, one company that could stand to benefit substantially is BP (NYSE:BP).

Originally known as the Anglo-Persian Oil Company, BP has a rich history as a British multinational oil and gas company that is involved in all areas of the oil and gas industry, including exploration, production, refining, and distribution.

Over the past few years, quarterly revenues have exploded higher from $27.5 billion in Q4 2020 to $52.8 billion in Q3 2023. And yet the stock this year has simply treaded water, rising marginally by 2.9%.

So, if black gold does take off again, what does the future hold for BP shareholders?

Why Buy BP Stock?

The first thing that jumps off the page when considering BP stock is its dividend yield of 4.95%. With a payout ratio of just 18%, it appears its sustainability is not in question.

Speaking of that dividend, the company has maintained dividend payments for 32 consecutive years, so shareholders can have a lot of confidence it will continue long into the future.

Over the past twelve months, BP has managed to report operating income of $41.3 billion on revenues of $226 billion, suggesting there is ample room to pay the $4.6 billion dividend.

Another very interesting number that jumps off the cash flow statement is the $9.8 billion share repurchase of common stock over the past year. Notably, BP share price has risen by just 4.3% over that same duration.

While it’s true that the share price generally trades with low volatility, the enormous buyback doesn’t seem to have registered much or, at the very least, translated to a bullish tailwind for investors. A breakout in oil may change all of that.

After all, BP is highly tethered to the price of oil. That’s nowhere more evident than on the income statement where year-over-year revenues grew in the four quarters of 2021 by 11.4%, 71.1%, 36.9%, and 83.0%. That came at a time when oil ran up from $51 per barrel to $74 per barrel.

So, how do analysts rate BP now?

Is BP Stock Undervalued?

According to 17 analysts, BP is undervalued by 22.4% with a consensus price target of $42.64 per share.

Wall Street research analysts are not the only ones who assess BP to be on sale at this time. During Q3, management bought back $2.0 billion of shares, signaling their conviction that the share price is discounted relative to fair value.

It’s hard to argue with the analysis when looking across the board at other key metrics, too. For example, the price-to-earnings ratio is just 3.9x and the shareholder yield, which factors in both the dividend and net buybacks, is 9.0%.

Across a gamut of oil stocks, including Valero, Exxon, Marathon, Chevon and Occidental Petroleum, BP trades at the lowest price-to-earnings ratio of them all.

BP is trading at jus 0.4x the Iast twelve month’s of sales, or in other words a $98 billion market capitalization for a firm posting $226 billion to the top line.

Using one of Buffett’s favorite measures further validates the thesis that the stock is on sale. It’s trading at just 1.4x book value.

Interestingly, a cash flows analysis reveals an almost identical fair market value for BP of $43 per share, also suggesting north of 20% upside potential.

If there was an obvious drawback, the $45.9 billion in long-term debt is a bit hefty at a time when rates are elevated and interest obligations will only increase on re-financings. With that said, it’s not as if BP is at risk of a cash crunch in the foreseeable future with $29 billion of cash sitting on the books.

Is BP Stock a Buy?

BP shareholder fortunes are closely tied to those of oil prices, but notably the latter appears to be breaking above a multi-month downtrending resistance line. If the technical breakout were to hold and oil prices were to rise, the revenues and profits of BP are likely to follow in tandem.

Without an increase in oil prices, BP has strong enough fundamentals now to make a compelling argument that it is on sale at this time. Whether its on earnings or sales multiples, dividend or book value, BP looks attractive.

Management is clearly on board with the view that BP is trading at a discount to fair value and has been aggressively buying up shares to the tune of almost $10 billion in the past year.

Perhaps the biggest drawback to owning BP at this time is the forecast that revenues will slide by an average annual rate of 1.7% over the next 5 years. That presumes, though, that no major wars break out or other black swan events occur to spark a sustained rise in oil prices. 

The bottom line is that BP appears to be largely ignored by the market at this time as it focuses on high-flying growth stocks and technology sector runaways but 2024 may bring a dose of reality back to the market, and with it, a renewed focus on value stocks that have been out of favor but which offer massive revenues, high profits, and handsome dividends, just like BP. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.