Is BP Stock a Bargain After 24% Rise and New Alternative Energy Focus?

• Thinking about whether BP is undervalued, fairly valued, or trading at a premium? You're not alone. The answer might surprise you as we dig into the numbers.
• The stock has gained 2.6% in the past week and is up 24.4% over the last year, hinting at rising investor confidence or shifting expectations.
• Recent headlines have highlighted BP's ongoing investment in alternative energy and a renewed focus on shareholder returns. Both of these factors have kept the market's attention. These moves come amid global shifts in energy demand and renewed scrutiny of major oil players.
• BP currently scores 5 out of 6 in our valuation checks. This suggests the company is undervalued on most counts. Let's break down the ways analysts typically value the stock, and stick around for an even smarter way to look at value at the end of the article.

BP delivered 24.4% returns over the last year. See how this stacks up to the rest of the Oil and Gas industry.

Approach 1: BP Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates the value of a business by projecting its expected future cash flows and then discounting them to today's value. This approach offers an objective way to assess what BP could be worth based on its ability to generate cash over time.

BP's most recent Free Cash Flow stands at $10.3 billion. Analysts project future annual Free Cash Flows through to 2029, with Simply Wall St extrapolating figures beyond that horizon. BP is forecasted to generate $9.8 billion in Free Cash Flow in 2029, with the broader ten-year outlook suggesting relatively steady annual cash generation near this level.

The DCF calculation indicates that BP's intrinsic fair value per share is $7.82. Based on current market pricing, this implies the stock is trading at a 42.8% discount to its estimated fair value. This suggests the market is undervaluing BP by a significant margin.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests BP is undervalued by 42.8%. Track this in your watchlist or portfolio, or discover 839 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for BP.

Approach 2: BP Price vs Sales

The Price-to-Sales (P/S) ratio is a particularly relevant valuation tool for established companies in sectors like oil and gas, where profits can swing with commodity cycles but revenues remain steady. The P/S ratio helps investors gauge how much they are paying for each pound of BP's annual sales, regardless of fluctuations in net earnings.

Generally, a "normal" or "fair" P/S ratio is influenced by a company’s growth outlook and its risk profile. Faster-growing firms or those with more stable and predictable sales typically command higher P/S multiples. In contrast, companies facing uncertainties or industry headwinds tend to trade lower.

Right now, BP’s P/S ratio stands at 0.49x, which is well below the industry average of 1.84x and the peer group average of 1.80x. Simply Wall St’s proprietary Fair Ratio for BP is calculated at 1.44x. This reflects not just industry norms but also BP's specific growth prospects, profit margins, market cap, and exposure to risk.

Unlike a raw comparison against peers or the wider oil and gas sector, the Fair Ratio provides a more personalized benchmark for BP. It accounts for nuances like company size, expected earnings trajectory, and overall risk, giving a truer sense of where BP “should” trade.

Comparing BP’s current P/S of 0.49x to its Fair Ratio of 1.44x suggests the stock is attractively priced and significantly undervalued according to this approach.

Result: UNDERVALUED

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1411 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your BP Narrative

Earlier, we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. A Narrative is a concise story that links your view of BP’s future with numbers, including your assumptions about its fair value, revenue, margins, and earnings.

This approach goes beyond static ratios or consensus estimates by allowing you to express your personal conviction about BP’s potential. It combines financial forecasts with the underlying reasons that support them. With Narratives, available to all investors on Simply Wall St’s Community page, you can quickly see the story behind the numbers and the numbers behind the story.

Narratives empower you to decide when to buy or sell by comparing your fair value with the current stock price. As they refresh dynamically when new information arises, such as news or earnings updates, your analysis can stay relevant over time.

For example, some BP Narratives in the Community reflect a bullish view with a price target as high as £5.20 based on consistent margin improvement and successful upstream expansion. Others set a conservative target as low as £3.82, emphasizing risks in the energy transition and ongoing operational challenges. Narratives help you see these perspectives in context, so you can make sharper investment decisions tailored to your views.

Do you think there's more to the story for BP? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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