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At 190p, are BP shares the best stock market bargain to buy right now?

Matthew Dumigan
·3-min read
Note paper with question mark on orange background
Note paper with question mark on orange background

The BP (LSE: BP) share price has performed woefully over the last few months. In fact, since the beginning of the year, the company’s valuation has plummeted by a staggering 60%.

So, at 190p, could it be the case that BP shares are now simply too cheap to ignore?

Causes of the BP share price tumble

In reality, the poor BP share price performance comes as no surprise given the circumstances. Since the outbreak of the Covid-19 pandemic, the oil and gas supermajor has received one blow after the other. From a slump in the demand for oil to crashing prices, BP has been bleeding cash for some time now.

As a result of the financial hardship and, like many other companies listed in the FTSE 100, BP was forced to slash its dividend in a desperate effort to preserve cash. Inevitably, this dealt another serious blow to the company’s share price. After all, BP has always appealed due to its bulky yield.

What’s more, as revenues continued to slump, the company was forced to write down its assets and forecast lower oil prices in the future.

But on Tuesday BP reported an underlying profit before tax of $1.2bn in the third quarter of 2020, which is a clear improvement over previous quarters. However, when compared to the $4.5bn profit over the same period last year, it pales in comparison.

While at the present time it certainly remains a picture of doom and gloom at BP, I think investors like me who are searching for a bargain should look beyond the immediate future and consider the company’s long-term prospects. For example, I like the increasing shift towards renewables.

A quick glance at BP’s future outlook

While BP won’t cease to be an oil and gas company overnight, the industry titan is beginning to make the transition into the world of renewables. The group is planning a twenty-fold increase in renewable generating capacity, including vast increases in biofuel and hydrogen output.

Investment into the renewables side of the business will be costly. But in spite of this, it’s something that could prove immensely worthwhile for the company in the long run, I feel. From every angle, the renewables industry looks set to be a lucrative market one day. Moreover, if any firm is capable of cementing itself as a major player in the sector, I’m confident it will be a well-established industry giant such as BP.

In the meantime however, the company reckons it can break even on a cash basis with a Brent crude price of $42 a barrel, which seems a realistic long-term price target in my opinion.

Final verdict

Ultimately, at 190p, I reckon BP shares are among the best stock market crash bargains to buy today. In my view, the potential rewards far outweigh the risks.

In any case, considering the staggering under-performance of the company’s market valuation, I’m confident the shares are due a rebound. With that in mind, I would be prepared to hold for the long term and I think I could realise some attractive returns down the line. Ideally, this will be through a combination of share price appreciation and dividend payments.

The post At 190p, are BP shares the best stock market bargain to buy right now? appeared first on The Motley Fool UK.

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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020