In the past few weeks there has been little change in the share price of BP (LSE BP). BP shares have risen nearly 13% since the week before Christmas, after being in a long slump since April.
Nevertheless, in five years BP’s share price has fallen by 12%. That compares to a 24% price increase for competitors A shell at that time.
Indeed, it offers a dividend yield of 5.6%. But Shell contributed 4%. Across the pond, Dividend Aristocrat Exxon Mobil yields 3.6% and has seen its share price grow 68% in five years.
So, could the recent rise in BP shares suggest it is starting to close the valuation gap with its competitors?
BP is emerging from a strategic fog of its own making
The main reason the company left Shell and especially Exxon is what I consider a self-inflicted wound.
Some years ago it made a big brouhaha about changing its product mix to one that relied less on fossil fuels and emphasized renewable energy. Shell has done the same thing with a lower level of ambition, while Exxon has remained largely an oil and gas company.
The economics of that change did not convince the market. BP under its current management has begun to focus on moving less aggressively away from fossil fuels.
Adding clarity around that has helped restore investor confidence in the company, in my opinion.
Trade remains unremarkable
So, what has driven the price up in recent weeks?
Last week the company released its quarterly trading statement. But what it contained was unpleasant and unsettling.
Total debt was expected to end the quarter lower than at the end of the previous quarter, and river production was expected to be lower. There were also negative currency and tax rate revisions in full-year guidance.
So, none of this out of debt reduction is good – but nothing that really bothered me either.
The share price does not look low
I think the recent share price reversal may reflect an emerging realization in the City that BP’s value has fallen further than it should.
Its £68bn market capitalization isn’t exactly cheap, but it’s less than half Shell’s. It is also less than six times the salary of the previous year.
Admittedly, the company’s earnings have fluctuated greatly in recent years. But a clearer strategic focus on areas of proven expertise and core assets bodes well for BP’s future benefits, in my view.
From a long-term perspective, with BP’s collection of energy assets, long business experience, strong brand and extensive sales activities around the world, I think the current price looks like a potential bargain.
That doesn’t necessarily mean it will continue to rise. The company has a lot of work to do in delivering a more focused strategy and where its fortunes will remain heavily tied to the price of oil, which tends to drop from time to time.
But I see continued value here and I plan to hold on to my BP shares, hoping to collect those sweet dividends along the way.
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