The BP (LSE: BP) share price has outperformed the market in 2021. Year-to-date, the stock has jumped 24%, outperforming the FTSE 100 by 22%.
However, the stock’s performance is less impressive over the past year. Since the beginning of March 2020, shares in the oil major have fallen in value by 5%, excluding dividends. The shares have underperformed the UK’s leading blue-chip index by around 15% over this period.
So, the BP share price has rallied in recent weeks, but the stock still appears cheap on a longer-term horizon.
With that being the case, I’ve recently been taking a closer look at the business to see if it could be worth adding the shares to my portfolio on this weakness.
BP share price growth
I think the company’s recent performance can be traced back to the oil price. The price of black gold recently moved back above $70 per barrel, its highest level since the pandemic began.
This is excellent news for producers such as BP. Last year the company announced one of the most considerable losses in UK corporate history as it was forced to write off billions of pounds worth of assets due to falling oil prices.
City analysts have certainly become far more optimistic about the group’s prospects in the last few weeks. At the beginning of the year, analysts had pencilled in earnings per share of $0.26 for 2021. They have since revised these projections to $0.31, an increase of 19%.
If oil prices continue to trend higher, I think this projection could be subject to further upward revisions.
That said, forecasts can move up as well as down. If the oil price were to change direction and start falling again suddenly, the BP share price might follow suit. That’s perhaps the most significant risk the company faces right now.
Another challenge is the move towards renewable energy. BP is one of the world’s largest oil producers, but the world is moving rapidly away from using hydrocarbons as a primary power source. The company’s forecasts suggest global oil demand will peak in 2030. That’s only nine years away.
Falling oil demand could negatively impact oil prices, and BP needs to adapt to the new normal. The group plans to spend tens of billions of dollars over the next decade boosting its renewables business, but this might not be enough. There are also growing concerns that the firm is paying too much for renewable assets. This could hurt growth in the long term and damage BP’s balance sheet.
Long-term outlook
Considering all of the above, while the BP share price has outperformed the market over the past few months, I’m not going to buy the stock for my portfolio today.
BP has outperformed on rising oil prices, which is likely to be a short-term trend. In the long term, it’s challenging to see how the group will adapt to the new normal in the energy space while producing attractive returns for its investors.
