The oil price recovery should drive up the BP share price, but I expect a bumpy ride

The BP share price could climb higher and I would consider adding this FTSE 100 stock to my portfolio for long-term income and growth.

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As the price of crude oil rises, I think the BP (LSE: BP) share price should also climb higher. I would buy the stock today in anticipation of that, but would also be wary, as the company faces an awful lot of challenges.

Yesterday, the BP share price fell 4.53% after it unveiled a larger-than-expected full-year loss of $5.7bn, down from a profit of $10bn last year. Management blamed this on “lower oil and gas prices, significant exploration write-offs and refining margins and depressed demand”. You can blame Covid-19 for most of that.

Even though Brent crude has recovered to $57 a barrel, the pandemic has inflicted long-term damage. The FTSE 100 oil giant has now written-down the value of oil and gas assets by $6.5bn in response to lower long-term energy price forecasts.

The BP share is due a recovery

Yet I believe that if vaccines do their work, and the world eases out of lockdown, the BP share price could be among the biggest beneficiaries. Just as oil stocks were sunk by last year’s pandemic, they could fly in the recovery. The big worry is that mutant Covid could destroy my upbeat scenario, hitting energy demand (and everything else).

Another worry is that BP has high net debt, but at least this is now falling. Today’s figure of $39bn is a lot of money, but is $6.5bn lower than a year ago, helped by $4.2bn of divestments and other disposals in Q4. It may rise as BP funds redundancy for 10,000 staff, but yesterday management said it should still fall towards $35bn this year.

Right now, the BP share price comes with a 6.1% yield, covered 1.3 times by earnings. This stock is still a dividend hero, especially with so many FTSE 100 companies cutting their payouts. In the low-interest-rate world, this is not to be sniffed at.

The big question is whether BP can return to share price growth. The stock is still down 23% measured over five years, and 44% over the last 12 months. Although it has recovered lately as the crude price climbs, there is still a way to go.

Will renewables clean up?

I believe the BP share price could be due a rally – provided the post-pandemic recovery remains on track. Today’s entry price looks attractive to me at 12.9 times earnings, which suggests that some of the challenges the company faces are priced in. 

The great unknown is whether BP will succeed in its energy transition. The idea was that dirty energy would fund the shift into clean. That was until the pandemic hit fossil fuel revenues. Another worry is that we do not know whether renewables will prove that profitable. Clean energy is an exciting, innovative sector, but history suggests that a fast-paced transformation often creates more losers than winners.

BP is moving into US offshore wind with Equinor, supplying Amazon with renewable energy, and testing hydrogen and offshore carbon capture. The BP share price carries risks, but the rising oil price and attractive dividend also suggest sufficient rewards to me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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