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Where will the BP share price go in September?

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A plant pipetrack at BP's Hull Petrochemicals site
Image: BP

The BP (LSE: BP) share price has risen by less than 10% over the last year, but the price of oil has risen by 55%. So what’s going on? Why aren’t BP shareholders benefiting from the rapid recovery in the crude markets?

I think there are several possible reasons. But with a 5.4% dividend yield, and rising earnings, I’ve been considering BP as a potential buy for my income portfolio.

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BP’s in good shape

The first thing I’ll say is that I think BP shareholders are benefiting from the higher oil price. It’s worth remembering that the BP share price dropped below 200p last year, before recovering to the current level of around 300p.

This recovery has been driven by a strong operational performance. Over the last 12 months, BP has cut its net debt by 20% and reported the highest profit margins in 10 years. Broker forecasts suggest BP will report a net profit of $10.5bn in 2021. That would make this the most profitable year since 2013.

Looking ahead, City analysts covering the stock expect BP’s profits to be broadly unchanged over the next couple of years, providing good cover for the dividend.

With BP stock trading on 7.5 times forecast earnings and offering a dividend yield of 5.4%, I reckon the stock’s cheap enough for me to buy. The only thing that worries me is what lies ahead.

The big unknown

There’s no avoiding the elephant in the room. Climate change means the oil and gas industry is increasingly viewed as a dirty business on borrowed time. The expected switch to renewable electric power means that future demand for oil and gas could slide.

I think it’s fair to say BP’s now taking this situation seriously. Chief executive Bernard Looney is planning lasting changes to the group’s operations that should increase production of low-carbon energy, from 4GW to 50GW by 2030.

At the same time, the company plans to cut oil and gas production and achieve net zero emissions across is operations by 2050. The problem for investors is that we don’t know whether BP will be able to pull off this switch.

Operationally, I think energy groups like BP probably do have the ability to make the change. But it’s not clear to me if the company will be able to maintain its current size and profitability as its business changes.

BP share price: what next?

BP’s plan seems to be to sell some oil and gas assets while retaining a core of profitable production. The remainder of the business will be focused on retail (filling/charging stations and shops), chemical production and renewable energy.

My hope is that BP will be able to use cash from oil and gas production to fund its renewable projects. In this way, BP may be able to fund its net zero strategy while maintaining shareholder returns.

However, there’s no guarantee of this. Renewable projects have historically been less profitable than oil and gas production, so shareholder equity could gradually be eroded. There’s also the risk that oil prices could weaken or crash again.

All of this uncertainty means that, for me, the BP share price is probably about right at current levels. I don’t expect big gains in September. But I do think the stock is a reasonable buy for income today.

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Roland Head 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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