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Questor: BP’s bargain share price is too enticing to ignore

Questor wealth preserver: a sound strategy and solid financial position suggest the company is significantly undervalued

The performance of our wealth preserver portfolio’s commodity investments has been rather disappointing thus far. The four positions have produced total returns of roughly 13pc on average since being added to the portfolio in October 2021. This amounts to an annualised figure of around 4.5pc, which is below the average annual inflation rate of 6pc over the same period. It means our commodity holdings have failed to achieve our aim of maintaining the portfolio’s value in real terms.
While their past performance has undoubtedly been downbeat, it does not have any influence on whether they will remain part of the portfolio. Indeed, just because a stock has risen or fallen in the recent past does not mean it will necessarily continue this trend in future. Stocks that have soared can subsequently decline just as easily as shares which are on a downward trend.
As a result, we will only make changes to our commodity investments based on their future prospects relative to other opportunities. At present, companies such as BP look highly attractive given the potential risk and returns. Therefore, sticking with some of our portfolio’s existing commodity holdings would most likely represent a significant opportunity cost over the long run.
BP is a longtime Questor favourite. Since our original tip in August 2021, it has produced a capital gain of around 43pc versus a 14pc rise for the FTSE 100 index. When dividends received are included, our total return amounts to 62pc. Regrettably, the stock has not featured in our wealth preserver portfolio until now.
Despite its strong share price gain over the past three years, BP continues to look relatively good value. Its price-to-earnings ratio, for example, stands at just seven. This suggests that it offers a wide margin of safety, which equates to scope for further share price growth over the long run.
The company’s latest quarterly results showed that it continues to make encouraging overall progress in implementing its strategy. Profits in the second quarter rose by more than 6pc year on year and by 1pc versus the prior quarter’s figure. Strong cash flow allowed it to reduce net debt by roughly 6pc during the quarter, with its net gearing ratio amounting to a very modest 28pc. 
An improving financial performance and a solid financial position mean the company can continue to invest in new projects. Notably, it will drill a new oilfield in the Gulf of Mexico as it seeks to become a simpler business that is more focused on shareholder returns. 
To that end, it is on track to implement a share buyback programme amounting to $7bn (£5.3bn) in the current year that should offer support to its stock price. And with dividends rising by 10pc on a per share basis in the second quarter, its prospective income return of 5.7pc is becoming increasingly enticing.
The firm’s potent mix of income and capital return potential aligns with our wealth preserver portfolio’s focus on total returns. The company’s continued dependence on fossil fuels may not fit in with the world’s ongoing march towards net zero and the pace of global oil demand growth has moderated over recent months. But the prospect of interest rate cuts in the US and across other developed economies is likely to act as a positive catalyst.
To make room for BP among our wealth preserver portfolio’s commodity holdings, uranium investor Yellow Cake will be removed. It has produced a 35pc total return since being added to the portfolio in October 2021. Readers should note that its removal from the wealth preserver portfolio does not equate to a broader “sell” recommendation. Rather, we believe BP simply offers a more favourable long-term outlook given our wealth preserver portfolio’s aim and therefore has a stronger claim to a place within it. 
As ever, we expect BP’s share price to exhibit elevated volatility due to the close link between its financial performance and commodity prices. The same, though, could be said for almost any commodity-related stock. In Questor’s view, the company’s continued low valuation, solid financial position and sound strategy mean it offers a favourable opportunity on a long-term view.
Questor says: buy
Ticker: BP
Share price: 426.2p
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