Has the BP share price got long-term upside potential?

Despite profits recovering well, the BP share price remains far below its pre-pandemic levels. Is this a stock for me to buy now?

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The BP (LSE: BP) share price had a good run in 2021, rising over 30%. This was mainly because the price of oil recovered, and as a consequence, so did BP’s profits. But the shares remain far below pre-pandemic levels. So, is BP a great long-term buy or will it never reach its pre-pandemic levels again?

Results last year

Due to the rising oil prices, BP was able to report consistently strong results in 2021. Indeed, in the first nine months of the year, it reported an underlying profit of $8.75bn. In the same period of 2020, when oil prices were significantly depressed, it reported a loss of $5.8bn.

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There have been other positive signs, such as the reduction of net debt from over $40bn last year, to under $32bn most recently. This has placed the company in a far better financial position.

The higher profits have also allowed greater shareholder returns. The quarterly dividend most recently totalled 5.46 cents per share, a 4% increase on the year. At the current BP share price, this also equates to a healthy yield of nearly 5%. Further, it has continued to announce share repurchase programmes, and in the latest programme it’s aiming to buy back $1.25bn worth of shares. If the price of oil can remain at over $60 per barrel, it also expects to repurchase $1bn of shares for the foreseeable future. Hopefully, this will have a positive effect on the BP share price.

What are the risks?

With all these positives, it may seem slightly odd that BP’s price is still far below pre-pandemic levels. This is mainly due to the uncertainty that faces the company. For example, as seen last year, the price of oil can crash instantly. With the added worries around Omicron, this is certainly something to consider.

Further, many worry that the long-term future of BP is unstable due to climate change issues. This is because, as more people switch to products like electric vehicles, demand for oil may fall. This would have a severely negative effect on BP, despite its heavy investment in greener energy.

There are also fears that the renewable energy sector of the company will not be able to replicate the profits made in the oil division. This may restrict its ability to return a large amount of money to shareholders.

Can the BP share price rise further?

In the short term, I can see the share price rising due to that combination of high oil prices and share repurchase programmes. But I’m more dubious about its long-term future. Issues of climate change may see demand for oil drop, and while BP are investing into greener energy, I don’t believe this investment is sufficient yet. This is because it’s still prioritising shareholder returns, rather than long-term investment into the company. For this reason, I can’t see the share price returning to its former levels, and will be leaving the shares on the sideline.

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Stuart Blair 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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