Is it too late to buy BP shares?

BP (LSE: BP) shares are up around 22% over the past six months. As the price of oil has surged to a multi-year high, investors have been buying into the stock expecting further profit growth. Over the past six months, shares in the oil and gas company have outperformed the wider FTSE 100 index by 24%.

Over the past year, the FTSE 100 has returned 4% excluding dividends, compared to 15% for BP shares. 

However, despite this impressive performance, I think the stock does not yet reflect the company’s growth potential over the next couple of years. As such, I believe there is still time to buy the investment for my portfolio. 

The outlook for BP shares

Shares in the oil giant have come under pressure recently due to its exposure to Russia.

The group did have a significant stake in one of the country’s largest oil producers, Rosneft. Management has declared that the company will exit this stake. The cost of doing so has been pegged at $25bn.

Understandably, some investors have been put off by this loss. The stock dropped around 10% in the days after the firm announced the divestment.

BP could not really hold on to the position considering the current geopolitical situation. It really had to exit the holding. The good news for investors is that this $25bn figure is unlikely to have a significant impact on the company’s operations. Foreign exchange losses will make up around half of the loss. The rest will be an adjustment to the value of the holding. The loss will be a balance sheet adjustment, and it will have a minimal impact on the corporation’s earnings. 

That said, for 2021, the Rosneft stake paid BP $1bn in dividends. Compared to the company’s overall net profit of $7.6bn, that is a significant figure. 

However, City analysts are forecasting $14.5bn of profits for the company this year. Higher oil prices, in general, will offset the lost income from the Russian holding. 

Undervalued

Further, the stock is currently trading at a forward price-to-earnings (P/E) multiple of 6. I think this takes into account the loss of earnings and does not factor in any potential earnings growth. As well as this low valuation, the stock is also set to yield 4.7% in 2022. 

Having said all of the above, I should acknowledge that the oil price is highly volatile. If the price of ‘black gold’ suddenly collapses, BP shares could face significant selling pressure as analysts will have to revise their growth projections lower. The company may also face substantial financial liabilities for its role in the global climate crisis. 

I think these are the most significant risks the enterprise faces today, and I will be keeping a close eye on them as we advance. 

Despite these challenges, I think the company looks undervalued compared to its potential over the next couple of years. Therefore, I would be happy to add BP shares to my portfolio today as a growth and income play.