After the 30% rally, are BP shares overpriced — or should I be thinking more?
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BP (LSE: BP) shares have had a strong start to the year, rising almost 30% since January as investors returned to oil and gas stocks. Recently, however, the price has dropped about 7% from its high.
Naturally, that raises doubts among existing shareholders. Is this just a short-term fix after a big run, or the start of a deep slide?
New exploration push in Egypt
A big part of the growth story is BP’s role in Egypt’s new five-year oil and gas exploration program. The country aims to drill 480 new exploratory wells during that period, with a total investment of about $5.7bn, and 101 wells planned for 2026 alone.
If the project is successful, it will lead to new production and increase cash flow – but only if it can hit trading volumes.
For long-term investors, this is important. It shows that BP is still willing to invest heavily in traditional hydrocarbons, as it talks about energy transition and low-carbon projects. If oil and gas prices remain strong, this new development could be very profitable.
Looking at the numbers
The company’s most recent results have been disappointing, however. Profits fell sharply, down more than 100% year over year as one-off charges and weak refining margins dragged profits into the red. In simple terms, BP has moved from a healthy profit to a modest loss over the past 12 months.
On average, the shares trade at a forward price-to-earnings (P/E) ratio of nearly 13. That’s not an exaggeration, but it’s no longer a ‘bargaining ground’ – especially with income under pressure.
Also, the company’s return on equity (ROE) is nearly positive at about 0.12%, suggesting that management is currently only squeezing a small return from shareholders’ capital.
But on the income side, the dividend yield of 4.4% remains attractive, as it is higher than most UK green chips.
The balance sheet, however, still looks strong. BP carries a fair share of debt, with a debt-to-equity ratio of about 1.37, and rising interest costs leave little room for error if oil prices rebound or major projects go over budget.
Risks to be aware of
There are a few obvious dangers here. BP remains highly exposed to changes in oil and gas prices, which depend on global growth, OPEC decisions, and global shocks.
At the same time, the global push towards clean energy could slightly reduce the demand for fossil fuels in the next few decades. Not good at a time when BP is making more money on long-term projects like Egypt.
So, should I buy more?
Personally, I can still see a strong case for looking at BP as a long-term hold. The Egypt plan and other projects can support growth, and profitability continues to attract income.
But with earnings down 116% year over year and the balance sheet stretched, I’m in no rush to add after the 30% rally. For now, I’m happy to hold back and watch how profits, debt levels, and new projects develop before buying more.
Whatever your opinion on BP, diversity is important. Oil may be doing well now, but it pays to hold stocks in different sectors. That way, you don’t risk everything in one place.
