BP (NYSE:BP) stock is an energy market value play that many investors just don’t seem to appreciate, as the stock fell today following its earnings report. Fossil fuel price swings will invariably impact drillers like BP, so earnings won’t always be consistent. That’s par for the course and shouldn’t be considered a major cause for concern. Hence, as a value seeker and dividend aficionado, I am bullish on BP stock.
BP is a gigantic oil and gas (as in, natural gas) producer. The company is based in the United Kingdom (UK), so some American investors might not be attuned to the opportunity with BP stock.
BP also has financial interests in green energy. CEO Murray Auchincloss recently hinted that the company might make some moves in the low-carbon energy sector. However, oil and gas are BP’s bread and butter, and there’s something here for energy industry value hunters to feast on in 2024.
BP: Here’s a Metric You Need to Know
If you’re going to invest in a UK-based oil and gas major, you’ll need to know the industry’s lingo. A metric that you should be aware of is called replacement cost profit. As BP explains, replacement cost profit “reflects the replacement cost of supplies” and “is arrived at by excluding from profit inventory holding gains and losses and their associated tax effect.”
The bad news is that, in 2024’s first quarter, BP’s replacement cost profit declined 40% year-over-year to $2.72 billion. Furthermore, BP’s profit attributable to shareholders decreased dramatically, from $8.2 billion in the year-earlier quarter to $2.3 billion in Q1 of 2024.
Although BP’s quarterly earnings track record isn’t terrible, the company’s first-quarter 2024 replacement cost profit decline is a hard pill for investors to swallow. In an interview, Auchincloss cited “higher-than-expected deferred taxes, and that the company’s underlying pretax earnings were 5% ahead of what Wall Street had expected,” according to Barron’s.
The tax-related problems sound like issues that probably won’t occur in every quarter. Hopefully, these will prove to be non-recurring unfortunate events for BP.
However, as you might have suspected, there’s more to the story than tax issues. In this year’s first quarter, BP had to deal with lower oil and gas prices and, consequently, weaker fuel margins.
Oil prices started out lower at the beginning of the quarter and then rose, but they still remained below the September 2023 peak. On the other hand, natural gas prices have been in the gutter this year. Relatively mild weather conditions are a contributing factor, but mainly, it’s due to a global oversupply of natural gas.
BP Cuts Costs, Buys Back Shares
BP can’t control energy prices, but it can control its cost-discipline strategy. On that topic, BP plans to focus on simplifying its structure to deliver at least $2 billion in cash cost savings by the end of 2026. This plan includes using artificial intelligence (AI) applications for customer service and other uses, hiring lower-cost engineers, and working with the company’s suppliers in order to eliminate “waste.”
At the same time, BP will continue to return value to its shareholders. As Bloomberg reported, BP “pledged to repurchase $3.5 billion” worth of the company’s shares “in the first half of the year, matching the pace of prior quarters.”
In addition, BP declared a quarterly dividend of 43 cents per share. This represents a significant increase compared to BP’s 40-cent dividend from the first quarter of 2023.
That says a lot about BP as an investable business. Some energy companies may be tempted to reduce their dividend payouts or curtail their share-buyback programs when oil and natural gas prices fluctuate. In contrast, BP maintained its commitment to respecting the company’s loyal shareholders.
Finally, there’s the question of value. BP can still offer excellent value to the stockholders, as the company just had a rough quarter but is still profitable. Besides, oil and natural gas prices aren’t historically known for staying low forever.
Since replacement cost profit is the key metric in this case, there’s no point in obsessing over P/E ratios, P/S ratios, and so on. BP will offer excellent value because the company’s tax issues shouldn’t persist for too long and because the company is willing to implement some important cost-cutting measures. On top of all that, BP’s management understands the value of rewarding its investors through dividends and buybacks.
Is BP Stock a Buy, According to Analysts?
On TipRanks, BP comes in as a Moderate Buy based on six Buys and three Hold ratings assigned by analysts in the past three months. The average BP stock price target is $38.44, implying 2.3% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell BP stock, the most profitable analyst covering the stock (on a one-year timeframe) is Sam Margolin of Wolfe Research, with an average return of 18.9% per rating and a 100% success rate. Click on the image below to learn more.
Conclusion: Should You Consider BP Stock?
Not everyone in the U.S. will want to invest in a UK-based energy company. However, I would encourage you to conduct your due diligence on BP. This company’s management is dedicated to providing value to the shareholders, even when oil and gas prices fluctuate.
So, the outlook appears to be bullish, as BP’s tax-related problems probably won’t persist for too long, and energy prices don’t tend to stay low forever. In the final analysis, I am definitely bullish on BP stock and would consider it to be an income investor’s secret international pick for 2024.
