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I BP (LSE:BP) share price is down 17% since the start of the year. That may be a sign to investors that now is a good time to consider buying shares.
In terms of valuation, there is a lot for investors to like and the stock looks unusually cheap. But there’s a lot more to investing in an oil company than just looking at what the charts say.
What are the charts
The drop in share price has put BP stock in an interesting position. First, it has a dividend yield of more than 6%, which is the highest it has been in a long time.
BP harvest for the year 2015-24
Created in TradingView
The last time a stock gave this kind of return in the last 10 years was in 2020. But that was not the best time to buy it.
Oil prices had just taken a turn for the worse and BP’s profits were about to drop. It has not fully recovered from its pre-pandemic levels, so investors may have been right to be cautious.
BP Dividends per share 2015-24
Created in TradingView
Things are not quite the same this time. Oil production may increase, but I don’t think this will make the price worse in the near future.
What the charts can tell
The charts show that BP shares look unusually attractive from an income perspective. But they don’t reflect some of the key risks the company faces.
The UK government has decided to increase taxes on oil and gas production. At the same time, the US is looking to lower corporate taxes.
That puts BP at a disadvantage to some of its US peers. And this is something that is not reflected in the profit margin view or the historical valuation metrics of the company.
This is an important problem. The biggest competitive asset an oil company can have is a cost advantage – and production has become more expensive for BP.
One last chart: is it worth it?
BP shares are trading at an unusually high dividend yield, but the company’s position relative to its US rivals has weakened. The big question for investors is whether the discount is enough.
Comparing the stock to one of the US oil majors may be a useful way to think about things. ExxonMobiloperating primarily in the Permian Basin, it is a good example.
BP vs. ExxonMobil dividend yield for 2019-24
Created in TradingView
The difference is a dividend yield of 6.07% versus 3.15% (not including potential withholding tax). And it is important to note that this is the biggest difference in the last five years.
Whether or not this is enough to eliminate the risk is too close for me to drive. But investors with an optimistic view on oil prices may think this is a good opportunity to consider.
Stock at a discount?
The charts show that BP shares are historically cheap. Profit margins are unusually high and the discount to ExxonMobil is wider than it has been in the past five years.
What the charts can’t say, however, is what higher taxes will mean for business. And this is a big enough problem to get me out of jail for now.
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