3 key reasons why I think BP’s share price could soar following a 16% fall over the year…
BP’s (LSE: BP) share price is down 16% from its 12 February 12-month traded high of £4.71.
This could signal that the oil and gas giant is fundamentally worth less than it was before. Or it might indicate a great opportunity to buy a top-quality share at a bargain-basement price.
I think it is the latter, based on three key reasons.
Strong earnings growth
Over the long run, it is a firm’s earnings growth that powers its share price and dividends higher.
A risk to BP is an extended period of lower oil, gas and oil products prices with no compensating rise in production or refining margins. Oil products are derived from crude oil through refining and include gasoline, diesel, and petrochemical feedstocks, among many others.
However, in an 11 July trading update it said its oil and gas production will be higher than previously forecast. It did not provide a specific number, but in Q1 it produced around 2.24m barrels of oil equivalent per day. The ‘oil equivalent’ measure reflects the energy content of different fuels (such as gas) in terms of one crude oil barrel’s worth of energy.
It added that Q2 will see a 39% year-on-year rise in average refining margins to $21.1 (£15.71) per barrel (pb).
On the other hand, BP said that crude oil prices averaged $67.88 pb in Q2, compared with $75.73 pb in Q1.
Its Q2 results will be released on 5 August.
Consensus analysts’ forecasts are that BP’s earnings will increase by a stunning 34% every year to end-2027.
Undervalued share price
A share’s price and value are not the same thing. As a former senior investment bank trader, I know spotting the difference between the two can lead to big profits. And the bigger the initial undervaluation, the larger those profits can be.
The best method I have found to identify a valuation gap is through discounted cash flow (DCF) analysis. This shows where any firm’s share price should be, based on cash flow forecasts for the underlying business.
The DCF for BP shows its shares are 46% undervalued at their current price of £3.97.
Therefore, their ‘fair value’ is £7.35.
Rising dividend yield
I think many investors overlook the very high dividend yield that BP is now delivering.
Specifically, in 2024 it paid a dividend of 31 cents (fixed at a 24p sterling equivalent). This generates a present dividend yield of 6%. By comparison, the average FTSE 100 yield is just 3.5%.
However, analysts forecast the annual payout will rise to 24.7p this year, 25.1p in 2026, and 26.2p in 2027. Based on the current share price, these would generate respective yields of 6.2%, 6.3%, and 6.6%.
The current 6% yield would provide £8,194 in dividends on a £10,000 holding after 10 years. This is also provided that the dividends are reinvested back into the stock (‘dividend compounding’).
After 30 years on the same basis, the dividends would increase to £50,226.
Adding in the initial investment would give the BP holding a total value of £60,226. And that would generate a yearly dividend income of £3,614 by that point.
Give these three reasons, I for one will be buying more BP shares very soon.
The post 3 key reasons why I think BP’s share price could soar following a 16% fall over the year… appeared first on The Motley Fool UK.
Investing in AI: 3 Stocks with Huge Potential!
🤖 Are you fascinated by the potential of AI? 🤖
Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.
If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…
Then you won’t want to miss this special report inside Motley Fool Share Advisor – ‘AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!
And today, we’re giving you exclusive access to ONE of these top AI stock picks, absolutely free!
More reading
- If investors had bought £1,000 of BP shares 5 years ago, they’d have made…
- Up another 6% in the last week! Is the BP share price ready to go gangbusters?
- 2 FTSE 100 stocks that could soar if interest rates fall
- Come on Shell! Here’s why you could consider buying BP shares…
- Will these FTSE 100 shares surge or sink in July?
Simon Watkins has positions in Bp P.l.c. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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.
