Whenever I have covered the BP (LSE: BP) share price, I have consistently concluded the stock looks cheap compared to the company’s potential. And as the market continues to overlook the opportunity, shares in the oil and gas giant are only getting cheaper.
BP share price outlook
At the time of writing, shares in the company are changing hands at a forward price-to-earnings (P/E) multiple of 6.8. Based on current analyst projections for growth, this figure could fall to 6 by 2022.
There are a couple of reasons why I think investors might be avoiding the company. Its exposure to the oil and gas industry and general economic uncertainty are the two primary factors.
Investors are worried about building exposure to hydrocarbon companies as the world tries to clean up its act. At the same time, the pandemic is still causing uncertainty for the global economy. The price of oil dropped more than 10% last week as concerns about the new variant grew.
I understand why investors might want to avoid the company for the above reasons. However, I think it is difficult to overlook the value on offer here from a fundamental perspective.
The world is still consuming vast amounts of oil and gas. Even the most optimistic forecasts suggest this trend will continue for the next decade at least. And even if the transition away from hydrocarbons accelerates, BP should be well-placed to capitalise on this change.
The company is investing tens of billions of pounds to build out its renewable energy business over the next decade. This will help the corporation diversify and prepare for the future.
Management is using cash flow from the legacy of oil and gas divisions to fund this expansion, which seems incredibly sensible.
What’s more, there will also be cash left over to reduce debt and increase shareholder returns. Indeed, at the time of writing, the stock supports a dividend yield of 5.1%. That is compared to the FTSE 100 average of around 3.5%.
Income and growth
I think it would be foolish for me to ignore the risks and challenges BP may face in both the near and long term. Nevertheless, even when I factor these challenges into the company’s valuation, I think the low stock price is difficult to justify. In my opinion, I think the stock should command a forward P/E of around 10. This suggests it could be worth 40% more in the long term.
This is just a rough valuation estimate. There is no guarantee the stock will increase in value by 40% from current levels.
Still, I am attracted to the BP share price for the company’s valuation. Its 5% + dividend yield also looks extremely attractive in the current interest rate environment. And with this being the case, despite the challenges outlined above, I would buy the shares for my portfolio today.
Rupert Hargreaves has no position in any of the shares mentioned. 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.
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