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The BP share price is down 10%. I’d buy now for long-term passive income

Oil rig

The BP (LSE: BP) share price resurgence has slipped lately, with the stock down 10% in the last month. But that’s hardly a surprise. It had probably outrun itself, as investors piled into oil stocks to take advantage of the post-vaccination economic recovery.

That recovery now looks less certain as Covid tightens its grip in Europe and governments start locking down again. This could hit demand for oil, and is one reason why a barrel of Brent crude has now dropped below $80.

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Yet I reckon recent BP share price slippage looks more like a buying opportunity for me as I seek long-term passive income. Yes, Covid is coming back, but so is winter. Asia is topping up its LNG inventories to avoid a repeat of last year’s supply shortages. Britons need no reminding that energy prices are soaring, both at the pumps and at home.

A good year for FTSE 100 energy stocks

2021 has been a good year for oil producers that are on course to bank record profits, driven by a 70% oil price and 115% gas futures spike. BP’s recent Q3 profits beat expectations at $3.32bn. One year ago, they stood at a meagre $86m. It’s not hard to see why the BP share price has done so well over that time.

The group’s net debt also fell — slightly — to $42.7bn, and ongoing plans to divest $25bn of fossil fuel assets by 2025 should help on this front. 

BP is being generous to shareholders right now. It plans to increase its dividend by 4% a year and buy back $1bn of shares every quarter for the next five years (provided oil prices remain above $60). Its forecast dividend yield is 4.9%, beating FTSE 100 rival Shell’s 3.8% for now, while cover of 2.9 provides some comfort.

The BP share price trades at a modest 7.3 times forward earnings, just in case I needed more encouragement. While rising prices are squeezing consumers, history shows that commodities like energy tend to hold their value better when inflation is high.

There are dangers, too. The good news is in and things could be tougher going forward. Some will argue that management should be investing money in the green transformation, rather than throwing it at shareholders. Surplus cash generation of $933m could be higher.

BP share price growth may slow, but I’d still buy it

This matters because BP chief executive Bernard Looney has professed his aim to lead the oil sector’s clean-energy transition, including plans to cut oil output by 40%. This will not be easy. Two flagship renewables investments, solar energy firm Lightsource and electric-vehicle charging firm bp pulse, are losing tens of millions of dollars, according to Reuters.

There are also signs of looming oil oversupply, with the US Energy Information Administration forecasting this could average 900,000 barrels a day during January and March. Non-Opec supply from the US, Canada and Guyana is expected to rise. Inflation is squeezing consumers on every front, and this could also hit oil demand. Gas prices in the States are at record highs.

As I said about Shell on Thursday, BP is no longer a surefire bet. Yet it’s working hard to keep shareholders on its side. I would buy BP at today’s share price, mostly because of that high and rising dividend.

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Harvey Jones 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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