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BP shares are now my top FTSE 100 pick for May

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In the past, I’ve written about why I believe BP (LSE: BP) shares could be one of the best FTSE 100 investments to own today. 

The company’s latest set of figures for the first quarter of 2021 have only reinforced my view. As profits return, I believe the group is now in a solid position to drive growth in the years ahead.

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The outlook for BP shares

This time last year, BP was struggling under the weight of two enormous challenges. As demand for oil and gas plunged in the coronavirus crisis, losses were spiralling, and management had to deal with the unenviable task of reporting one of the largest losses in UK corporate history.

The group also had to develop a plan to remain relevant in a world where green energy will replace hydrocarbons as the world’s primary power source within the next few decades. Both of these challenges proved to be substantial headwinds for BP shares. 

BP confronted the second of these issues with an ambitious plan. Management wants to build 50Gw of renewable energy for the group’s portfolio by 2030. To do this, BP will need money, a lot of money. The price tag could be as much as $60bn. 

Windmills for electric power production.

Luckily, the company has been given a leg up by rising oil and gas prices. After plunging to below $20 a barrel in April last year, the price of crude is now firmly back above $60. Throughout 2019, crude traded in a range of between $60 and $70 a barrel. 

As the price of oil has recovered, so have BP’s profits. Its reported first-quarter profits hit $4.7bn. It lost $4.4bn for the same period last year. Thanks to the jump in cash generation, net debt fell from $38.9bn at the end of 2020 to $33.3bn in the first quarter. 

Cash and growth 

In my opinion, this cash generation is a critical metric. BP will need cash to meet its renewable energy plans. It will also need balance sheet flexibility to borrow money to fund renewable projects, which can be incredibly expensive. It now has both of these qualities. 

These figures confirm my opinion that BP shares could be a great addition to my portfolio. Not just for May, but also for the long term. By deploying cash from its legacy hydrocarbon assets into green energy products, I think the business can secure its future and, more importantly, grow. 

Unfortunately, the company’s transition is unlikely to be plain sailing. The challenges of the past 12 months have shown how challenging it can be for oil companies to operate. If there’s another significant oil price decline, BP may have to put its renewable plans on ice. This could have a considerable impact on the company’s long-term outlook. If the oil price suddenly slumps, it could also negatively impact the group’s balance sheet and dividend to shareholders. 

Still, even after taking these challenges and risks into account, I think BP shares could be one of the best long-term growth investments in the FTSE 100 at present. That’s why I’d buy the stock for my portfolio today. 

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Rupert Hargreaves 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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