BP (LSE: BP.) shares are a popular investment in the UK and it’s easy to see why. This is a well-known FTSE 100 company that pays decent dividends.
But are the shares worth me buying right now? Let’s discuss.
Trading at a discount
Looking at the oil giant today, I can certainly see some appeal in its shares.
For a start, the company trades at a huge discount to the market. At present, analysts expect BP to generate earnings per share of 90.9 cents for 2023.
This means that at today’s share price, the stock has a forward-looking price-to-earnings (P/E) ratio of just seven.
Given that the average P/E ratio across the FTSE 100 index is about 13, there could be some value on offer here.
The energy sector is rebounding
Second, sentiment towards energy shares appears to be improving.
The first half of 2023 wasn’t a great period for the energy sector. With oil prices slumping and investors focusing on technology/AI shares, stocks like BP were left for dead.
However, in recent months, there’s been a bit of a shift in the market. Oil prices have been moving higher, and so have energy stocks.
I think there’s a reasonable chance this trend could continue in the near term, given the low valuations across the sector.
It’s worth noting that analysts at HSBC recently raised their target price for BP shares to 555p from 515p (which is roughly where they are today).
Dividends are rising
Of course, there are also the dividends on offer.
Currently, analysts expect BP to pay out 28 cents per share in dividends for 2023.
That puts the yield here at about 4.3%, which is attractive.
And the payout is rising. Recently, the group raised its H1 dividend by a healthy 10%.
Analysts at Morgan Stanley, who just named BP as a top sector pick, see strong dividend growth ahead.
On top of these dividends, BP is also buying back shares. In August, it started a $1.5bn buyback. This activity can increase earnings per share over time.
Share price uncertainty
On the downside, earnings here can be volatile.
This is illustrated by the fact that for Q2, underlying replacement cost profit (the firm’s definition of net income) came in at $2.6bn versus $8.5bn a year earlier.
This means it’s hard to know where the share price will go in the future (earnings tend to drive a company’s share price in the long run).
The company also has a fair bit of debt on its balance sheet. At 30 June, net debt stood at $23.7bn. This adds risk now that interest rates are higher.
Renewable energy shift
Additionally, the company is going to be spending a lot of money on its renewable energy business in the years ahead. Recently, it advised that between 2023 and 2030, it plans to invest $55bn to $65bn on electric vehicle (EV) charging, biofuels, hydrogen, wind, and solar.
I think this is the right move in the long run. But it adds some uncertainty in the medium term.
Some analysts believe that BP is moving too fast and spending too much on renewables (whose returns are inferior to fossil fuel returns today).
My view
Overall though, I think the shares look attractive today. I feel they have the potential to provide solid returns from here.
That said, they’re not my top stock market pick right now. Ultimately, there are a few other UK shares I’d snap up before BP.
