BP (LSE: BP) shares have had a great run recently. Twelve months ago, its share price was hovering around the 240p mark. Today however, it’s near 350p.
This upward momentum seems to be attracting investors. Last week, BP was the third most purchased stock on Hargreaves Lansdown. Should I follow the herd and buy BP shares for my investment portfolio? Let’s take a look.
BP’s share price is on the rise
I can see why BP shares are popular right now. For starters, the company is benefiting from the spike in oil prices (Brent Crude has surged from around $50 to $84 this year). Higher oil prices are pushing revenues, profits, and cash flows up significantly.
BP’s recent third-quarter results, for example, showed:
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Total revenue of $37.9bn compared to $26.3bn a year earlier
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Underlying replacement cost profit (the company’s definition of net earnings) of $3.3bn versus $86m a year earlier.
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Operating cash flow of $6bn versus $5.2bn a year earlier
“The company is a cash machine at these sorts of (oil and gas) prices and the business is running very well,” said CEO Bernard Looney after the results.
Renewable energy
Secondly, BP has been making big moves in the renewable energy space. This is an area that investors are very keen on right now.
Last year, the group announced a major renewable energy transformation programme and said that within 10 years, it plans to be a very different kind of energy company. By 2030, it plans to cut oil and gas production 40%. Meanwhile, by 2050, it hopes to be a ‘net zero’ business.
To achieve its clean energy goals, it plans to ramp up its investments in low-carbon energy to $5bn a year.
Should I buy BP shares?
While there are things to like about BP in the current environment, I’m not convinced the stock is a good fit for my portfolio.
As I explained in another article, I like to invest in high-quality businesses (consistent revenue growth, high return on capital, low debt, etc) that operate in high-growth industries. These kinds of businesses tend to produce high returns for investors in the long run. Looking at BP, it doesn’t meet my criteria.
Sure, renewable energy is a high-growth industry. This sector looks set for massive growth over the next decade. However, BP is still very much in the early days of its transition to clean energy and the company has its work cut out to achieve its goals.
It’s worth pointing out that the weakness in the share price since the company’s Q3 results suggests the market is a little sceptical in relation to BP’s renewable energy transition.
“It needs to prove to shareholders and the markets as a whole that it can transition to renewables in a way that doesn’t hammer its margins, and the jury is likely to remain out on that,” Michael Hewson, chief market analyst at CMC Markets, said after the results.
As for the ‘quality’ of the business, it’s quite low, in my view. Debt is high at $32bn and profitability in recent years has been very low. The company also cut its dividend last year.
Overall, I don’t see much appeal in BP shares right now. As a long-term investor, I think there are much better stocks I could buy today.
