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BP’s (LSE: BP.) share price has taken a major hit recently. Year to date it’s down around 16% while over one year it’s down about 38%. Is there value on offer after this double-digit percentage pullback? Let’s discuss.
A value stock?
At first glance, shares in the oil giant do look quite cheap right now. Currently, City analysts expect BP to generate earnings per share (EPS) of 54 cents in 2025. That forecast places the stock on a forward-looking price-to-earnings (P/E) ratio of just eight. That’s well below the UK market average and miles below the P/E ratios on US-listed energy giants Chevron (13) and Exxon (14).
A few other metrics are also worth highlighting here. One is the stock’s free cash flow yield. Last year, BP’s free cash flow was 71 cents per share. That puts the trailing free cash flow yield at about 16%, which is very high (a high ratio can signal that there’s value on offer).
Then there’s the dividend yield. It’s currently about 7.5%. That’s also high. Often, cheap stocks sport high yields.
Cheap for a reason?
However, before we rush out and buy the oil stock because it looks cheap, there are a few issues to consider. Often, cheap stocks are cheap for a reason.
One major issue to be aware of is that US President Donald Trump wants to bring oil prices down (oil is already down about 7% over the last month). His goal is to boost US production (his mantra is ‘drill, baby, drill’) and he hopes this will lead to lower prices.
Now, lower oil prices would have a negative impact on BP. They would most likely lower revenues, cash flows, and earnings (pushing the P/E ratio up and making the shares look less cheap).
Another major issue is the possibility of a global recession in the near future (which is looking increasingly likely given the uncertainty surrounding tariffs). This would most likely reduce demand for oil, which wouldn’t be good for BP.
A third factor to be aware of is investor sentiment, which is weak right now and could remain depressed for a while. The issue here is that a lot of major investors aren’t happy with BP’s shift away from renewable energy.
One such investor is Legal and General, which is currently BP’s seventh-biggest shareholder. Recently, it said that it was “deeply concerned” by the company’s decision in February to reduce its focus on clean energy in favour of oil and gas.
This kind of negative sentiment could keep the stock depressed. Because large investors can be influential when it comes to share prices.
What now?
So, where does this leave us?
Well, there’s certainly a chance that BP shares could deliver solid returns from here (especially considering the high dividend yield). So, they could be worth considering.
However, my personal view is that there are better shares to consider buying. I’d rather put my money into a company that has more attractive long-term prospects.
