The BP (LSE: BP) share price has jumped higher over the past few weeks. Since the end of August, the stock’s risen 14%, compared to a decline of around 2% for the FTSE All-Share Index.
To put it another way, shares in the oil major have outperformed the market by approximately 16% over the past month. Following this performance, the stock’s returned 44% over the past 12 months, excluding dividends. The FTSE All-Share Index has returned just 22% over the period.
The BP share price has accelerated higher as the price of oil has reached a three-year high. The price of Brent crude is trading around $80 per barrel, the highest level since October 2018.
And Wall Street analysts expect the price to continue rising. One group of analysts from Goldman Sachs reckon oil prices will hit $90 a barrel by the end of the year.
BP share price outlook
While rising oil prices can only be good news for BP, investors should look past the company’s current situation. Indeed, commodity prices can rise and fall in the space of a few weeks.
For example, the price of lumber more than quadrupled between May 2020 and May 2021. However, after hitting an all-time high of around $1,700 in May, the value of the commodity has since fallen 62% to around $640.
As such, just because the price of oil’s trading at a multi-year high today doesn’t mean it’ll continue to do so. Still, rising oil prices will help boost the group’s bottom line. That is why the BP share price has reacted positively.
The organisation should be able to use this additional cash to reduce debt and pursue its strategy to increase renewable energy output.
The company’s second-quarter results give some guide as to how high oil prices will help it. BP reported free cash in the quarter of $3bn, up from $719m in the same quarter last year. With cash flow rising, the group reduced net debt by $8.1bn for the 12 months to the end of the second quarter.
It was also able to ramp up capital spending on renewables. In the first quarter of this year, the group spent $1.9bn on gas and low-carbon projects and just $1.3bn on oil production and operations.
Renewable energy shift
This is all part of the company’s shift towards renewable energy. By 2030, management wants to be spending $5bn a year on low-carbon energy projects, up from $500m in 2020.
Of course, this strategy could backfire. If the oil price remains high, BP will regret not spending more on expanding its oil and gas output. It could also suffer if it ends up overpaying for renewable energy assets. The prices of these assets worldwide are rising as investors rush to take part in the green revolution.
Nevertheless, I think BP is making the right decision to future-proof the business. That’s why I believe that despite the recent performance of the BP share price, the stock’s still undervalued.
As well as its long-term growth potential, the company also offers a dividend yield of 5.9%. Considering all of the above, I don’t think it is too late to buy shares in the oil giant.
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.