Earnings: BP shares are a steal at 490p

Earnings season in the oil majors is big news today. Today is my turn BP (LSE:BP) to report. Like his friend shell, profits were the best in its 114-year history. However, while many investors continue to worry about the prospects for Big Oil on both a short- and long-term basis, I continue to advocate that BP’s share price remains strong in the bargain area.

Profit record

For the financial year 2022, BP reported very good figures. Revenue increased by 50% to $280bn. Each segment contributes to that number. A notable performer is gas and low-carbon energy, which increased by 82% compared to 2021.

Underlying profits more than doubled to $27.7bn. Operating cash flow rose 73% to $40.9bn. This metric is key for shareholders as the company is committed to generating 60% of its excess cash flow through share buybacks.

In Q4, the company completed $3.2bn of buybacks and plans to execute a further $2.75bn in Q1 2023.

In addition, it has increased its dividend by 10% to 6.61 cents per share. The dividend yield is equal to 4.5%.

However, despite the record numbers, it continues to be done with caution. Net debt has now fallen for the 11th quarter. This means lower interest costs.

Big Oil is not dead

Yes, this is an impressive figure. But the reason why I continue to be bullish on BP and insist that the stock is undervalued, is because of its future prospects.

Oil is, and continues to be, the lubricant of the global economy. If a company in the tech space made the kind of profit that BP announced today, its share price would be trading at many multiples of today.

The fact that it doesn’t is partly a consequence of the large amount of capital being distributed today. The excess froth may be pouring out of Big Tech stocks, but investors continue to buy the dip believing they are a bargain. I don’t agree.

The cost of capital is rising. Inflation is still rising. In such an environment, I prefer to invest in companies that generate near-term profits. If oil stocks continue to outperform, I foresee a final stampede of capital into space.

Risk

The obvious risk of investing in BP is that the world may have passed peak oil. Encourage governments and communities to accelerate the move to cleaner energy sources, which could mean being left with stranded assets in the future.

I believe that the switch to greener energy sources is inevitable. What I disagree with is the time frame. The rush to move away from hydrocarbons is commendable, but before that can happen, green energy must be scalable.

Disincentivising companies from investing in exploration and production, I believe, will not solve the energy crisis. What this will do is ensure that supply remains tight and cause structural inflation.

A lot of people disagree with me. However, I like to take the opposite stance. After all, not following the crowd is what helped Warren Buffett get rich.

Therefore, whenever finances allow, I will continue to increase my position in BP.