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PA (LSE: BP.) The shares had an impressive run in September, rising more than 9% to finish the month at 531p. This rise was part of a broader trend the stock has experienced over the past 12 months in which it has risen more than 7%. However, in the last week it appears to have lost some momentum, falling more than 5%. Does this dip present the perfect buying opportunity for my portfolio? Let’s investigate.
Market performance and influencing factors
The strong rally in BP’s share price during September was underpinned by a sharp rise in oil prices. Brent crude, originally priced at $86 a barrel, rose to nearly $92 a barrel over the course of the month. This significant boost in oil prices was mainly attributed to supply concerns.
These concerns were fueled by the announcement that Saudi Arabia and Russia would extend their voluntary production and export cuts until the end of 2023, greatly reducing supply. This bodes well for companies like BP, as reduced supply drives up oil prices and translates into higher revenues, profits and cash flows.
Valuation and dividend potential.
One thing that attracts me to the stock is its current cheap valuation. With a price-to-earnings (P/E) ratio of just six, BP stock looks like good value for money to me. This figure is also significantly lower than its industry counterparts, such as Shell, Total Energiesand China Oil and Chemicalswhich trade with P/E ratios of 7.7, 8.1 and 7.9 respectively.
BP also has a healthy dividend yield of more than 4%, surpassing the FTSE 100 average. Projections also indicate that this figure could increase in the future, sweetening the situation even more.
In addition to paying dividends, another way BP uses its cash is by buying back its shares. The company reportedly plans to undertake a $1.5 billion buyback ahead of its third-quarter results. This could help increase BP’s earnings per share, creating value for shareholders.
Not all sunshine and rainbows
Although oil prices have risen in recent months, the long-term outlook is not good for oil giants like BP. Today we still depend on this basic product to fuel our daily lives. However, decades from now this will probably not be the case. As the world moves towards renewable energy, current players like BP will have to reinvent themselves to survive.
This risk has been exacerbated by the recent resignation of CEO Bernhard Looney. He had laid out ambitious plans for the company to be emissions-free by 2050. His departure certainly leaves some doubts about whether this goal will be achieved.
The verdict
Overall, I think the recent drop in BP’s share price could present me with a great buying opportunity. With the dwindling supply of oil, I think BP’s profits will continue to rise in the near future. In addition to this, the current valuation seems very attractive to me.
While there is some uncertainty about the company’s long-term direction, I think the tangible positives outweigh that, so I’m thinking about buying some shares for my portfolio in the near future.
