Why I think the BP share price can return to 500p

The last time the BP (LSE: BP) share price traded above 500p was in September 2019. At the time, most people had not heard of Covid-19, and the outlook for the global economy was bright.

For 2019 as a whole, BP earned a net profit of $4bn or $0.20 (15p) on a per-share basis. The company’s dividend for the year totalled 30p per share, giving a dividend yield of 6% on a share price of 500p. 

Only two years have passed, but BP today is a very different business than in 2019. After reporting a substantial loss of $20bn for 2020, one of the largest losses in British corporate history, earnings have rebounded.

City analysts have pencilled in potential profits of $12bn this year. And based on these estimates, the stock is trading at a forward price-to-earnings (P/E) multiple of 7.6. 

Unfortunately, as profits have rebounded, the dividend has not followed suit. BP’s per share dividend will amount to 16p this year, according to analysts. Based on the current stock price, this implies a dividend yield of 4.7%. 

Climate change concerns 

As the company’s profits have rebounded, I would have expected the share price to return to 500p. But there is another factor at work here. Investors and institutions worldwide are under pressure to sell any corporations with exposure to the hydrocarbon sector. This includes operations like BP. 

As the world gets to grips with climate change, activists are trying to pressure companies like BP to change their ways. There is also increasing concern that these oil and gas businesses will have to write off hundreds of billions of pounds worth of assets if the world moves away from oil and gas too quickly.

And they could also be held liable for their polluting ways, in the same way the tobacco industry was held accountable for its effect on the health of the general population. 

Considering these risks, it is understandable that the BP share price attracts a lower valuation today than it did in 2019, despite higher profits. 

BP share price outlook 

Nevertheless, BP is divesting hydrocarbon assets, and it is reinvesting the proceeds in renewable energy projects. Over the next couple of years, management is planning to increase renewable energy capacity substantially. And as the company moves down this path, I think the market’s opinion of the business will change. This could support a higher valuation. 

Over the past five years, the stock has traded at an average P/E multiple of around 10. City analysts reckon the business will report earnings per share of about 52p for 2022. A multiple of 10 times earnings suggests this could support a share price of 520p.

This is just a back-of-the-envelope calculation, and it does not consider the company’s energy transition. However, I think it shows the stock’s potential over the next few years. Considering this growth potential, I would buy the shares for my portfolio today as an income and growth investment.