The BP (LSE:BP) share price is on a great run in the market. The stock has risen 13% in the last month and 46% in the last 12 months. Oil prices have crossed three-year highs and BP’s profitability is back to pre-pandemic levels. Analysts are predicting oil prices to hit $90 a barrel. Does this surge in demand and prices mean it’s time to add BP shares to my portfolio? Let’s find out.
The return of dividends
Earlier this year, BP announced that the interim dividend for the second quarter (Q2) of 2021 was set at 3.95p per share, to be paid on 24 September 2021 to shareholders on the share register on 13 August 2021. This 4% jump is a clear sign of improving revenue generation after dividends were halved in 2020. Estimates show that the final dividend by the end of 2021 could be 15.8p per share based on current dollar exchange rates.
Oil companies bounced back well from the sharp decline in demand during 2020. BP’s first-half (H1) report showed an increased cash reserve of $5.4bn. The company announced a $1.4bn share buyback as a result of this surplus. The British oil giant also strengthened its commitment to a ‘resilient dividend within its disciplined financial frame’. I think this points to a slow return to the pre-pandemic (2019) dividend yield of 6.5%.
Switch to greener alternatives
I strongly hold on to the opinion that the future of renewable and sustainable energy sources lies in the hands of oil giants. Driven by global demand, dwindling oil reserves, and evidence of climate change from emissions, the management plans on devoting $5bn to low-carbon energy projects by 2030. BP has a roadmap in place to switch to more carbon-neutral energy extraction methods. The company plans on becoming a net-zero company by 2050 or sooner.
Chairman Helge Lund reinforced this commitment and said, “While this is a journey that will require patience, our goal is that BP over time will become a more valuable company for its shareholders and bring wider benefits for society”.
Although this move looks risky, I think it is a necessary step in future-proofing the company. If the oil giant succeeds in making the switch, it could become a global leader in sustainable energy. This will prove excellent value if I make an investment in BP shares today.
BP share price verdict
The company is seeing a surge in demand which is driving share prices up in the short term. But the business looks well-set to chip away at its sizeable debt of $32.7bn for a sixth consecutive quarter. The current dividend yield stands at 4.5%, which could increase substantially in the coming months as the company expects Q3 revenue from oil production operations to be higher than Q2.
I am also optimistic about the switch to greener alternatives. Given dwindling global oil reserves, companies stand to profit in the short term from increasing demand. But as other oil-dependent industries make the switch, I expect a widescale change in the energy requirements across various supply chains. The BP share price could benefit immensely from this.
Oil prices do pose a risk. If barrel prices drop below the expected median of $60, revenue will take a sizeable hit. But the commitment to raising the dividend yield and to switch to greener alternatives makes BP shares a buy for my long-term portfolio.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Suraj Radhakrishnan 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.