In the middle of October 2020, I wrote an article claiming that with the BP (LSE: BP) share price trading at a near 25-year low, the stock looked cheap.
As it turns out, my call was a bit premature. When my article was published on the 17th of October, the stock was trading around 210p. Over the following week, it fell further, declining below 200p.
However, after falling below 200p, the BP share price quickly recovered. Since then, shares in the oil giant half rebounded by more than 100%.
Including dividends, the stock has returned around 110% since my article was published in October 2020.
The outlook for the BP share price
Unfortunately, I did not follow my own advice for personal financial reasons. If I had, I would be sitting on a substantial return. The good news is, I do not think I am too late for the party. Even though the BP share price has added more than 100% over the past year and a half, I think the stock can continue to push higher.
As geopolitical tensions send the price of oil surging, City analysts have rushed to revise their earnings forecasts for the company over the next two years. According to analysts projections, the corporation is set to earn an average net profit of $14bn per annum for the next two years.
Based on these estimates, the shares are trading at a 2023 price-to-earnings (P/E) multiple of 7.4. The stock also offers a dividend yield of 4.1%. Considering its earnings forecasts and strong balance sheet, it looks as if the company has plenty of room to hike cash returns for shareholders over the next few years.
I do not want to speculate too much on how much the enterprise can return to investors. After all, this is going to be a variable figure. Oil prices can be incredibly volatile. If the price of the black gold suddenly falls 50% in a few weeks, the outlook for the BP share price will change dramatically.
This is probably the most considerable risk of investing in companies like BP. Still, as the current environment proves, volatility can be a double-edged sword.
The green transition
As a long-term investor, I am not going to try and predict what will happen to the price of oil over the next few weeks, months or even the next year. What I am really excited about is how the company’s current windfall will help BP accelerate its green transition.
Last year the organisation set out plans to increase renewable energy investment and carbon emissions over the next couple of decades. With profits rising, management has revisited these targets. The group now plans to half its operational emissions by 2030.
It was previously planning a 30% to 35% reduction by this date. It is also looking to ramp up spending on green technologies by 40% within the next three years. Management is confident that the enterprise will hit its target of developing 20 gigawatts (GW) renewable power capacity by 2025 and 50 GW by 2030.
Based on these targets and the company’s current valuation, I think the BP share price remains an attractive investment. It also looks to me to be a relatively inexpensive way to build exposure to the green energy transition. That is why I would continue to buy the stock for my portfolio.
