A year ago, it was hard to be optimistic about BP (LSE: BP) shares. Oil prices were very low, the company had to take extremely large impairment charges and it was also unprofitable. Despite this, I bought BP shares, due to its strong recovery prospects and the fact that it is transitioning into greener energy. Since then, things have become slightly better for the oil giant. Indeed, oil prices have made a strong recovery and BP has returned to profitability. As such, is now the time for me to buy more shares?
Last year, BP announced that it was transitioning into greener energy, through increasing its low-carbon investments by 1,000% by 2030. It has also shown its commitment to this green future with some recent acquisitions. For example, it has just bought 9 gigawatts of solar projects in the US for around $220m, while also adding some other renewable assets in Europe. At the same time, BP has also been selling many of its oil assets, to help refocus the business.
I am optimistic about this transition into greener energy, which is one of the main reasons why I initially bought BP shares. Despite this, it does have to be mentioned that the renewable energy sector is competitive, and BP may have left its transition too late. Indeed, the company’s oil assets are worth significantly less than they would have been a few years ago.
The trading update
Fortunately, I feel that BP is well supported by its current hydrocarbon business in the short term. In fact, in its first-quarter trading update, the company made a profit of over $4.6bn, with operating cash flow of over $6bn. Due to these strong results, BP has also been able to reduce debt significantly, while also reintroducing its share buyback programme. This demonstrates optimism for the future, and I have bought more BP shares since this excellent trading update.
There are two main risks that I can highlight with the BP share price. Firstly, there is the uncertainty presented by the pandemic, especially on a global scale. This could cause oil prices to fall, a very large negative for any oil firm. Secondly, due to climate change, the long-term future of oil firms does look uncertain. Although BP is making the transition into greener energy, and at a quicker pace than other oil companies, there is the risk that it becomes a far smaller company in the future.
Is it time for me to buy more BP shares?
In comparison to last year, the prospects look far brighter for this FTSE 100 stock. Nonetheless, I feel that this has not fully been reflected in the BP share price, currently priced at around 320p. This is far lower than its pre-pandemic price of around 500p. This cheap price may be one reason why the company has restarted its share buyback programme. As such, and because of these improved fortunes, I will happily continue buying BP shares.
Stuart Blair owns shares in BP. 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.