In the changing environment of the energy sector, i BP (LSE:BP.) price has been a confusing thing to follow. As one of the market leaders, many would expect the company to have a good year. But so far in 2024, shares have shed a staggering 21.6% of their value. This dramatic decline has left many investors wondering: will BP remain at the top, or is there a continued offer for the next generation of companies in the energy sector? Let’s take a closer look.
A challenging year
Consider this: as summer drew to a close, the price of Brent crude oil rose, most recently hitting $72.70 per barrel — a 2024 drop that sent shockwaves through the industry. Meanwhile, BP’s Q2 results came in with all the grace of an oil rig in the swimming pool, missing analyst expectations and leaving shareholders disappointed.
In fact, the entire oil and gas industry has been struggling with challenges recently. Weak gas prices and refining restrictions have depressed overall profits. The company saw a drop in profit margins from 8.2% to 3.7%.
Reasons for optimism
However, in the midst of this storm of problems, a ray of hope shines for the bargain hunters among us. The company’s price-to-earnings (P/E) ratio has fallen to a staggering 11.6 times, a record low FTSE 100 average about 20 times. In addition, the calculation of discounted cash flow (DCF) suggests that the company may be undervalued by 20.1%. Of course, there’s no metric that guarantees the stock will turn around anytime soon, but given its strong form and large resources, I wouldn’t bet on it.
And let’s talk about assignments, shall we? With the yield currently sitting at 6%, and a payout ratio of 68%, the company looks very attractive to cash-strapped investors.
An uncertain future
Obviously, with most of the revenue coming from non-renewable sources, the company’s fortunes are still heavily tied to the volatile oil price. As governments move towards an uncertain future, it is unclear what this will do to the balance sheets of current market leaders.
Then there is the small matter of the firm’s green energy ambitions, which aim to produce 50GW of renewable energy by 2030. It’s like watching a tank try to make a three-point turn in the River Thames – it’s amazing when it works, but there’s always the risk of running away.
Let’s not forget the chaos that controls the industry as well. As governments around the world watch oil profits closely, the threat of tax evasion is ever-present.
A fool’s takeaway
So, is BP’s share price profitable or not? However, the combination of a juicy dividend, strong recovery potential, and green ambitions make for an interesting setup. However, the company’s $55bn debt, while improving, remains a major problem. And the company’s green transition is far from certain, with any number of new and emerging players looking to take market share.
There are no doubt many twists and turns ahead in this industry, but with $35bn in cash available, I wouldn’t bet against the company making a smart move, and being a big part of the future. I will be buying shares when I get the next chance.
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