Up 30% this year, the BP share price still looks undervalued despite oil surging. What’s the catch?

The BP (LSE: BP.) share price opened up round 2% larger this week as oil markets surged once more. Brent futures reached $111 a barrel on Monday (18 Might), with WTI at $105.

For a enterprise that has mentioned each $1 transfer in the oil price can swing pre‑tax working revenue by $340m, that sort of price motion actually issues.

So, is this only a quick‑time period spike – or the begin of one thing lasting for BP buyers?

Elements supporting additional progress

When crude stays excessive, BP’s earnings engine often hums. Latest quarters have proven that clearly, with the firm reporting a primary‑quarter underlying revenue of $3.2bn.

That’s greater than double the similar interval a yr earlier, helped by what it referred to as an “distinctive contribution” from oil buying and selling and stronger refining margins. 

So apart from refining oil, it’s cashing in on unstable power markets, 

UK coverage might add one other profit, with Rachel Reeves reportedly planning to increase the present 5p per litre responsibility tax on motor gas relatively than increase it.

That received’t remodel BP’s fortunes in a single day, however holding down pump costs tends to assist demand at the margin.

If oil stays costly and governments keep away from hitting drivers with further tax, might BP’s money flows keep stronger for longer?

The revenue (and worth) attraction

On some measures, BP still looks surprisingly low-cost. Utilizing a reduced money movement (DCF) mannequin, the shares are estimated to commerce round 57% beneath honest worth. That’s based mostly on earnings forecasts that count on progress of 10.39% per yr going ahead.

It received’t essentially pan out that approach, however it does echo different analysts that see BP as deeply undervalued on lengthy‑time period money era.

As one analyst put it, BP “seems underpriced given the strategic enchancment story overlayed on a backdrop of excessive oil costs.”

For many buyers, although, it’s the well-covered dividends that add actual attraction.

• Dividend yield: 4.5%
• Dividend per share: 25p
• Money protection: 6.8 instances

Plus, it’s already raised this yr’s Q1 dividend by 4%, backed by substantial share buybacks in latest intervals.

However that doesn’t imply it’s a assured money machine.

A difficult street forward

Excessive oil costs received’t clear up all of BP’s issues. Negotiations with union members at BP’s Indiana refinery have resumed, however either side are still removed from agreeing on job safety, pay and different phrases.

It’s additionally reshaping its portfolio, having offered gasoline property overseas and doubtlessly dismantling elements of its pipeline gasoline buying and selling crew. That might sharpen the give attention to larger‑return tasks, however it additionally provides execution threat.

The excessive sensitivity to crude costs and political shocks is the core concern. If oil had been to retreat sharply, or rules tightened, would at present’s ‘low-cost’ valuation still look so engaging?

My verdict

Clearly, BP still has quite a bit to supply for buyers who need publicity to conventional power and may deal with a bumpy experience. Excessive oil costs, robust buying and selling outcomes and a lined 4.5% dividend definitely add attraction.

But it surely still faces geopolitical shocks, industrial disputes and execution threat.

For me, the revenue story alone is value contemplating, which is why I’ll maintain holding my shares even whereas oil swings wildly.

Mark Hartley owns shares in BP.