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Home » UK Shares » BP remains undervalued despite 20% plus YTD share price surge

BP’s share price has been among the FTSE 100 index’s better performers in 2022. The energy major has recorded a 22% rise in its market value since the turn of the year, which far exceeds the index’s meagre 1% gain.

Of course, the firm has benefitted greatly from improving operating conditions over recent months. The price of crude oil has risen from $75 per barrel at the start of the year to currently trade at around $115 per barrel. This catalysed the company’s financial performance in the first quarter of the year and led to underlying replacement cost profit of $6.2bn.

Clearly, the future prospects for oil and gas prices remain highly uncertain. Factors such as a post-pandemic economic recovery and lower global supply resulting from sanctions on Russia could support higher energy prices. By contrast, rising interest rates that prompt a slower pace of economic growth could lead to lower demand for oil and gas. As a result, the company’s future financial performance could be rather volatile.

Further progress

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On a reported basis, BP’s first quarter financial performance was far less impressive because of its decision to exit a 19.75% stake in Russian energy company Rosneft. This resulted in a post-tax charge of $24.4bn and a total reduction in equity of $14.7bn. It contributed to a reported loss of $20.4bn for the quarter.

Despite this, the company was able to further strengthen its financial position. Net debt declined from $30.6bn at the end of 2021 to $27.5bn at the end of the first quarter. It now stands 18% lower than a year ago. This significantly lowers overall risk in an era of tightening monetary policy and uncertain economic performance.

Separately, the firm is continuing to make progress in developing its renewables exposure. For example, it has increased its position in offshore wind since the start of the year and has continued to progress with its ambitious electric vehicle charging strategy. Although investments in renewables are unlikely to make a significant impact on the firm’s financial performance in the near term, they provide a pathway to long-term growth as the world transitions to net zero.

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Low valuation

BP’s year-to-date share price rise has thus far been uninterrupted by political risk. Indeed, its shares are little changed following last week’s announcement that the UK will implement a windfall tax on oil and gas producers.

Although the firm has since stated that it will review its planned investments in the region, its global exposure means that higher taxes in the UK are unlikely to have a significant impact on its financial outlook. For example, just 5% of the taxes it paid in 2020 went to the UK government. The remainder was paid to governments in the wide range of countries in which it operates across the globe.

Trading on a forward price-to-earnings ratio of less than 6, BP’s shares appear to be undervalued on an absolute and relative basis. Although the company faces significant uncertainty in the short run and remains highly dependent on factors such as the global economic outlook, its improving financial position and shift towards renewables suggest it can continue to outperform the FTSE 100 index over the long run.

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This article is not investment advice. Investors should do their own research or consult a professional advisor.

Robert Stephens

Robert Stephens

Robert Stephens is a CFA Charterholder who has around 15 years’ experience working in the financial services industry.

The vast majority of that time has been spent working as an Equity Analyst, with a focus on FTSE 350 shares in the consumer goods, consumer services and retail sectors.

He has also contributed to a wide variety of media publications on a freelance basis, including The Telegraph, What Investment, Master Investor and Citywire.

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