A yield of 6.1% but a drop of 31%! Should I buy more BP shares?

BP shares offer a high yield projected to grow through 2026, with a significant earnings increase anticipated, suggesting the stock may be undervalued. BP (LSE: BP) shares have fallen sharply from their 12-month high of £5.40 on April 12.

This decline reflects a similar fall in global oil prices, driven mainly by reduced demand from China amid an uncertain post-COVID economic recovery. Additional downward pressure on oil prices comes from increased global supply. While OPEC+ has been cutting production, other countries have stepped up, balancing the effect.

The Oil Market Outlook In the short term, the bearish sentiment on oil might continue due to these factors, although geopolitical tensions in the Middle East could shift this outlook if the Israel-Iran conflict escalates.

Over the long term, however, I expect a shift. The green energy transition could take longer than predicted; even the UN’s 2023 Climate Change Conference noted that reaching net-zero by 2050 should follow scientific guidance. Since 2014, investment in oil and gas has fallen due to this transition focus, potentially creating future production gaps, which could lift oil prices if demand outpaces supply.

BP’s Core Business Since Murray Auchincloss became CEO in January, BP has adjusted its transition strategy. It dropped its goal to reduce oil and gas production by 2030 and scaled back investments in low-carbon hydrogen. The company also plans to sell its US onshore wind operations.

In contrast, BP is advancing development of its Gulf of Mexico assets (10 billion barrels of oil) and four fields in Iraq (9 billion barrels). BP’s Q3 results showed an underlying replacement cost profit of $2.27 billion (£1.76 billion), surpassing the forecasted $2.05 billion.

One risk for BP is the potential government push to resume its previous energy transition plans, which could reduce its market share and profitability. But as it stands, analysts estimate BP’s earnings will grow by 26.6% annually through 2026.

Share Price and Yield Long-term earnings growth can drive both share prices and dividends. Based on discounted cash flow analysis incorporating this growth, BP shares are 49% undervalued, with a fair price of £7.29 versus the current £3.72. Market fluctuations, of course, could impact this valuation.

Analysts also project BP’s dividends to reach 25.4p in 2025 and 26.7p in 2026, translating to yields of 6.8% and 7.2%, respectively, based on the current share price. With a current yield of 6.1% (22.5p dividend in 2023), these projections make BP shares look appealing. Given this strong growth outlook, I’m planning to buy more BP stock soon.

5 Shares for the Future of Energy For investors without exposure to the energy sector, this could be the right time to consider it, given the potential for growth in the energy market.

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