Down 25% and with a 6% yield, are BP shares a bargain buy?

The BP (LSE: BP) share price has been on a journey over the last six months. Unfortunately for shareholders, it’s been downhill all the way.

At the time of writing, BP shares are trading just above 400p, 25% below the 555p high seen in October 2023.

This drop has left the stock trading on just seven times 2024 forecast earnings, with a chunky 6% dividend yield.

Is a buying opportunity emerging at BP? I’ve been taking a closer look to find out more.

Profiting from price swings

One lesson I’ve picked up as an investor is that commodity stocks often go too high on the way up, and too low on the way down. I’ve seen it happen many times.

For investors who recognise what’s happening, this can create profitable buying opportunities. One of my best buys ever was picking up shares in FTSE 100 miner Anglo American at 378p, during the 2015 commodity slump.

I sold them less than 18 months later at over 1,100p, thinking I’d done well. But the market had the last laugh.

Anglo’s share price carried on to hit a high of more than 3,800p in 2022!

Is BP oversold?

Oil and gas producers like BP saw their share prices surge in 2022, when the Ukraine war led to a sharp rise in oil and gas prices. The market was worried that shortages might emerge, but as it turned out this didn’t happen.

Global energy markets have proved efficient at managing supply and demand. Oil and gas prices have now returned to the level they were at before the Ukraine war, despite events in the Middle East.

Unsurprisingly, BP’s profits have also fallen. The company’s recent half-year results showed the group’s underlying replacement cost profit (an industry metric) down by 27% to $5.5bn in H1 2024.

Despite this drop, BP’s profits are still looking pretty strong, relative to long-term average levels.

The company is in pretty good financial health too. Cash generation is strong and BP has been able to fund debt reduction, share buybacks and a rising dividend.

So much good news suggests to me that BP shares are unlikely to be at truly bargain levels right now, despite the falling share price. I don’t think the market really hates this stock at the moment.

Would I buy BP now?

The main risk I can see at the moment is that an economic slowdown could cause energy prices to fall further.

Recent data has suggested a slowdown in US consumer spending, for example. Container shipping prices have also fallen.

Broker forecasts for BP’s 2024 earnings have been cut by 28% since October last year. That’s almost an exact match with BP’s share price fall over the same period.

Further downgrades are possible, if energy prices keep falling.

Of course, lower energy prices are generally good news for everyone else. History suggests that lower costs tend to stimulate an economic recovery, eventually.

For this reason, I wouldn’t necessarily wait for a crash before buying BP.

My analysis suggests that fair value for this business is at least 500p. That’s more than 20% above the current share price.

With a 6% dividend yield on tap, I think BP is worth considering today.

The post Down 25% and with a 6% yield, are BP shares a bargain buy? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.