BP (LSE: BP) shares are 12% down from their 31 March one-year trade high of £6.09. That followed a steady gain over the previous three months after the 17 December announcement that Meg O’Neill would replace Murray Auchincloss as permanent CEO.
Although Auchincloss had already slowed BP’s greener energy transition ambitions, O’Neill is seen as a fully-focused oil and gas operator. And such pureplay energy firms consistently achieve significantly higher market valuations than energy-transition-focused companies.
Investors know they are getting immediate cash flow from oil and gas sales, returned via dividends and buybacks. Conversely, transition‑heavy firms are penalised for high spending on lower-margin infrastructure with payoffs far later in the investment cycle.
That said, the broader positivity to the appointment still appears intact, in my view. The recent share price dip largely reflects expectations of a peace deal between the US and Iran. This could push oil and gas prices lower in the short term and weigh on BP’s near‑term earnings. So, given the recent shift in personnel and business focus, where ‘should’ the stock be trading now?
What’s the true value of the stock?
Discounted cash flow (DCF) analysis helps investors cut through short‑term volatility and market noise by focusing on long‑term cash generation. It projects future cash flows for an underlying business and discounts them back to today.
Greater uncertainty over these cash flows results in a higher discount rate being applied, and analysts’ differing assumptions can lead to varying estimates of ‘fair value’.
But my DCF modelling here — including a 7.7% discount rate — shows BP is 49% undervalued at its current price of £5.46.
That places fair value around £10.71 — nearly double the present level.
So, if markets continue drifting toward fair value, this might be a tremendous potential buying opportunity if those DCF assumptions hold.
What are the key profit drivers?
For any share price gains to be realised by any firm, sustained growth in profits is required. A risk for BP is any delay across its new upstream projects that could weaken production growth. Another is any sustained bearish trend in oil and gas prices that could compress its upstream margins.
Nevertheless, analysts forecast BP’s profits will rise by a yearly average of 10% to end-2028 at minimum. And this looks an underestimate to me, based on its Q1 2026 results released on 28 April.
These saw underlying replacement cost profit soar 132% year on year to $3.2bn (£2.4bn) from $1.4bn. Operating cash flow edged up 1% to a towering $2.9bn,
The stunning numbers were supported by major new upstream fossil fuels progress. These included fresh discoveries in Angola and new Gulf of Mexico lease wins. The firm has also announced a slew of new exploration and development projects in the Nile Delta, Brazil, and Azerbaijan.
My investment view
BP’s refocusing on its fossil-fuel projects should power its profits and cash flow in the coming years, in my view.
This, in turn, should drive its share price ever higher towards its fair value, and to raise its dividends.
Consequently, I will be buying more of the stock soon. In the meantime, my attention has also been drawn to several other deeply undervalued stocks that also offer very high dividend yields too.
Should you invest £5,000 in Bp P.l.c. right now?
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Simon Watkins owns shares in BP.
