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The decline in crude oil prices has been comparatively considering the shares of oil companies since the beginning of the year. And they do multiple transactions on territory that they think should attract the attention of value investors.
It’s one of the most dramatic BP (LSE: BP) – After a 23% drop since the beginning of January, the stock has reached a dividend yield of over 6%. However, there are a few things investors need to know.
evaluation
Faced with that, BP is very similar shell (LSE: Shell) – one more FTSE 100 Oil tape measure. For example, both will trade at a ratio of around 9, with a price-to-revenue (P/E) ratio based on forecast revenues for next year.
Additionally, each has a break-even point of about $60 per barrel. Therefore, as long as crude oil prices are generally above the level they have since the pandemic, the two companies will still remain beneficial.
The two are similar from a strategy perspective. After failing to venture with renewable energy, BP reverted its prioritization to hydrocarbons.
This makes it seem like there is no significant difference between the two strains. However, there is at least one important difference that investors need to pay attention to.
Balance sheet
this year Berkshire Hathaway Shareholder meeting Warren Buffett said he spends more time looking at the balance sheet than most investors. And with BP and Shell, this is very obvious.
Shell’s debt-to-stock ratio is 0.4. This means that companies can clear all their debts by increasing their shares by 40%.
In contrast, the BP’s debt-equity ratio is 1.2. Therefore, to remove debts by issuing shares, the company must more than double the number of outstanding shares.
The 1.2 debt-to-fair ratio is not only higher than Shell, but also higher by BP’s historical standards. It’s even higher than during the Covid-19 pandemic, and this is a significant risk.
Investing in oil companies
The decline in oil prices weighs on energy stocks, but in reality I think lower prices will be a decent time to consider buying. The question is whether BP is the most attractive opportunity.
As I see, the company’s balance sheet is currently the biggest risk to its stocks. And the company is moving to lower its debt levels through cost reductions and divestitures.
The problem is, I’m not sure it’s a good time for oil companies to sell their assets. If the price is low, it’s better to be a buyer than a seller.
As a result, we do not consider BP’s stock to be undervalued. At least not in comparison to other oil companies. I’m not against the industry as a whole, but I think there’s a better opportunity to consider it elsewhere.
Activism
It is worth noting that there are activist investors on board BP. Elliott Management became a major shareholder earlier this year and is pushing for reform.
This can generate strong returns. However, due to the low weight of energy stocks across the board, I am looking elsewhere in the oil and gas sector for my portfolio.