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The BP share price is at a 25-year low! Here’s why I’d buy today

Rupert Hargreaves
·3-min read
New British One Pound Sterling Coin Chart Rate.
New British One Pound Sterling Coin Chart Rate.

The BP (LSE: BP) share price has plunged in value this year. In fact, after recent declines, shares in the oil and gas giant are currently changing hands at a 25-year low.

However, I think this could be an excellent opportunity for long-term investors to snap up a share of this business at a discount price. Today, I’m going to explain why.

BP share price value

Investor sentiment towards BP has plunged this year for two primary reasons. For a start, the oil price has collapsed. This has had a significant impact on the company’s profits. At the same time, the shift away from dirty hydrocarbons towards renewable energy has accelerated.

These two factors seem to have caught the company and its management by surprise. The group is now struggling to catch up, and the BP share price may continue to languish in the short term for this reason.

Still, the company is taking action. Management is planning to invest more in renewable energy projects, and the business is starting to cut costs. That said, it could be some time before these efforts begin to filter through to the group’s bottom line.

Long-term outlook

BP is currently facing a challenging operating environment. But I reckon it’s only a matter of time before the company’s turnaround starts to gain traction.

The firm remains one of the largest energy businesses in the world, and is still generating billions of dollars in cash from its oil and gas activities every year. By reinvesting these profits back into the business, the company should be able to adapt to the new normal in the energy world.

At the same time, as cost-cutting efforts filter through the business, the BP share price should benefit from improved investor sentiment as profit margins begin to recover.

City analysts are expecting this to begin to happen next year. Based on current oil price and profit margin expectations, analysts currently expect the business to report earnings per share of 20p for 2021. That puts the stock on a forward price-to-earnings (P/E) multiple of just under 11.

Meanwhile, the BP share price is projected to support a dividend yield of 7.3% in 2021. This is significantly above the market average, which sits at around 3.5%.

Undervalued

All of the above suggests to me that the BP share price is undervalued at current levels. As the business progresses with its plans to invest more in renewable energy and cut costs, profits should rise in the years ahead. At the same time, investors can look forward to that market-beating 7.3% dividend yield.

In my opinion, there aren’t many other companies that offer this combination of potential growth, value and income. As such, I think it’s likely BP could produce high total returns for investors from now on, when owned as part of a diversified portfolio.

The post The BP share price is at a 25-year low! Here’s why I’d buy today appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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