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The BP (LSE: BP) share price has fallen 9% since 10 February. Then again, it has risen 15% over 12 months. This presents something of a timing problem for me, as I have been considering adding to my existing holding.
The long-term Foolish investor in me knows that over time, the true value of a stock should emerge – positive or negative. I think for BP that is more likely to be positive than not.
But the short-term former investment bank trader in me does not want to ‘buy high’. If I did, then I might be looking at an indeterminate period sitting on a share price loss. And that loss might be sufficient to wipe out any dividend payments I picked up along the way as well.
And there are other risks in the stock to consider as well, of course. One of these is that anti-oil lobbying may affect its operations. Another is that any environmental damage caused at one of its sites could lead to severe fines.
Bullish operating environment
Currently, the oil and gas market is looking very bullish again. The Brent oil benchmark is trading near its highest level since 18 November last year.
On 5 September, OPEC leader Saudi Arabia said that its 1m barrel-per-day (bpd) production cut will continue to year-end. Energy powerhouse Russia will also extend its export cuts of 300,000 bpd for the same period.
These will add to the 3.66m bpd in collective cuts from OPEC+ since October 2022. Such output reductions are generally drivers of oil prices. They also support gas prices, as historically 70% of its price is comprised of the price of oil.
New developments
On 29 August, BP announced that it will invest US$3.5bn in Egypt’s gas fields. The country is already the third-largest natural gas producer in Africa.
Four other major extensions in production capacity from existing oil and gas fields will have occurred before year-end. Another 11 are scheduled for next year and the year after.
The company is also developing its cleaner energy business, with a commitment to net zero by 2050 or sooner.
It aims to increase the proportion of capital expenditure in transition growth businesses to around 50% by 2030. By then, it aims to deliver earnings of $9bn-$10bn from those businesses.
Valuation to peers
BP shares are currently trading at a price-to-earnings (P/E) ratio of 5.9. This is lower than its closest peers Shell (7.2), France’s TotalEnergies (8), and the China Petroleum & Chemical Corporation (8.7).
Factoring in the outlier in the group — Brazil’s Petrobras — the peer average is 6.7. This would suggest that BP shares are undervalued.
That said, its dividend appeal in recent years has been mixed. Last year, it paid 24 cents per share, which gave a yield then of 4.1%. At that point, the FTSE 100 average was around 3.9%.
More concerning for me was that the dividend cover ratio was -0.54. In 2020, it was an even more troubling -3.83 (on an 8.3% payout).
I am happy enough to keep my holding in BP, given what I believe to be sound business prospects. However, I will not be adding to my position at the current discount. I believe other stocks offer better share price appreciation and yield prospects at better discounts right now.
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