Sector Screener: do BP shares still have investment potential?

 Photo: STR/NurPhoto via Getty Images.

The FTSE 350 Oil & Gas Producers sector has experienced an extremely turbulent year to date. Having surged 32% higher in the first quarter of the year, it has subsequently slumped so that it is now up a rather more modest 10% since the start of the year. This figure, though, still compares favourably with the FTSE 350 index’s 4% year-to-date rise.

Clearly, the sector’s performance has been hugely influenced by the exceptional volatility displayed by oil and gas prices that, in turn, have been materially affected by the war in Iran. Given that the profitability of several sector incumbents is inextricably linked to the level of oil and gas prices, it is unsurprising that share prices have been positively correlated with the perceived level of geopolitical risk in the Middle East.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

A close link

In the short run, it seems likely that this close link will persist. Should the recently announced peace deal between the US and Iran remain in place, oil and gas prices are likely to continue their recent decline, given fears regarding supply levels are set to gradually dissipate as the Strait of Hormuz shipping route fully reopens. This could weigh further on performance of the FTSE 350 Oil & Gas sector.

However, there are no guarantees that a peace deal will endure. Given the recent fluidity and uncertainty regarding geopolitical risk in the region, as well as elsewhere across the world, this could mean that further heightened volatility in oil and gas prices, and therefore the share prices of industry incumbents, persists over the coming months.

Inflation and interest rates

The near-term outlook for oil and gas companies is made even more unpredictable by uncertain global economic prospects. Largely as a result of elevated energy prices over recent months, inflation has spiked to 4.2% and 3.2% in the US and the eurozone, respectively, with an increase to 3.7% in the UK also forecast by the end of the year. This has already prompted the European Central Bank (ECB) to raise interest rates, with a previously anticipated looser monetary policy elsewhere now apparently increasingly unlikely in the near term.

• Stockwatch: why US/Iran deal looks a boon for growth
• Brexit: biggest winners and losers 10 years on

Alongside the impact of an ongoing trade war, higher-than-expected interest rates could weigh on the world economy’s performance in the short run. This may equate to reduced demand for commodities that prompts lower prices and, in turn, leads to further share price volatility among members of the FTSE 350 Oil & Gas sector. As a result, the sector remains a relatively unpredictable and risky option for investors when compared to the wider stock market.

Source: ShareScope. Data at 23 June 2026. Past performance is not a guide to future performance.

Long-term potential

However, over a longer time frame, prospects for the sector could prove to be relatively upbeat. On the economic front, inflation is forecast to decline towards central bank targets in the UK, US and the eurozone over the medium term following its near-term spike. This should provide scope for monetary policy easing that, once time lags have passed, bolsters the global economy’s performance and creates more buoyant conditions for fossil fuel producers.

Furthermore, as recently as last year the International Energy Agency (IEA) stated that global demand for oil and gas could continue to rise through to 2050. Clearly, this is highly dependent on a multitude of factors, not least government policy towards renewables and energy security. However, it suggests that the long-term price outlook for oil and gas, and thereby the financial prospects for industry incumbents, may prove to be more upbeat than many investors presently assume amid the world’s push to achieve net zero.

• Bill Ackman talks IPOs, SpaceX and favourite tech stocks
• Insider: directors back recovery at two FTSE 250 stocks

Investor considerations

Of course, the inherent volatility of the FTSE 350 Oil & Gas sector means that investors wishing to focus on it should seek to obtain a wide margin of safety, in terms of unearthing stocks that trade well below their intrinsic value. After all, a sudden change in the level of geopolitical risk or in the global economy’s outlook, for example, could prompt severe paper losses.

Similarly, it is crucial to focus on companies that have a solid financial position. Modest debt levels and interest costs that are amply covered by operating profits, for example, provides them with the best possible chance of overcoming what is likely to remain a sustained period of elevated uncertainty for the wider sector.

A low valuation

Source: ShareScope. Data at 23 June 2026. Past performance is not a guide to future performance.

BP (LSE:BP.)’s share price has, as per the wider FTSE 350 Oil & Gas sector, been highly volatile over recent months. However, it still reached a 16-year high at the end of March and has risen by 15% year to date.

The firm’s earnings per share (EPS) is forecast to be 48% higher in the 2027 financial year than it was in the 2025 financial year. This means it now trades on a forward price/earnings (PE) ratio of 7.4. This is considerably below the FTSE 350 index’s earnings multiple of 16.6 and suggests the stock could offer good value for money. It also indicates it offers a relatively wide margin of safety at present, and suggests there is scope for an upward rerating over the coming years that may translate into capital gains.

Income potential

Separately, BP’s financial position appears to be relatively sound. Although its net debt increased by 14% in the first quarter of the current financial year compared with the final quarter of the previous financial year, its net debt-to-equity ratio amounts to just 33%. Furthermore, its net interest costs were covered 7.2 times by operating profits in the most recent quarter.

• Shares for the future: 2026 a low point for very profitable firm?
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

In terms of income, the company’s share price rise means it now has an annualised dividend yield of 5.2%. This, though, is more than 50% higher than the FTSE 350 index’s dividend yield of 3.1%. When combined with the stock’s scope for a higher rating, as well as its upbeat EPS growth prospects, this suggests it could deliver a relatively attractive total return over the coming years.

Elevated volatility

Of course, BP’s share price is likely to remain volatile in the near term. Its inherent reliance on oil and gas prices, which in turn are highly impacted by the prevailing level of geopolitical and economic risks, mean that paper losses would be wholly unsurprising – especially over the short run.

In addition, the company has made changes to its senior management team of late. This could mean that the firm’s long-term strategy is subject to a degree of change amid what remains a highly unpredictable and very fluid wider energy sector. This may further impact investor sentiment towards the company’s shares and, as a result, affect their performance.

Risk/reward

However, with BP’s shares currently trading on a relatively low valuation, upbeat profit growth forecasts, and its financial position appearing to be sound, the company seems to offer a favourable risk/reward opportunity on a long-term view.

When combined with its generous income return prospects, it appears to have a relatively attractive total return outlook, albeit with share price volatility likely to remain elevated for the foreseeable future.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.