What a rollercoaster it has been for world oil prices in recent years. As one of the top 10 largest oil producers in the world, and a stock that I have held in in the past, I was keen to understand what is likely to happen to the BP (LSE: BP) share price in the coming years and months.
On the back of basic fundamentals, BP appears to represent good value. At the current share price of 385p and its dividend yield of 4.15%, it would seem to represent a good hedge against rising inflation. The stock is also trading at a competitive price-to-earnings (P/E) ratio of 14 times, with analysts generally expecting stronger results for 2022.
Management also seems confident that BP is undervalued. In the last financial year, BP dedicated some $4.15 billion of its own money to a share buyback programme. This move should enhance future returns to shareholders and support an increased dividend pay-out in years to come.
On an operating level, BP has made substantial strides in recent years to move away from its heavy dependence on hydrocarbons into a more diversified energy business.
The oil and gas business has been streamlined heavily and is now focused on high-margin production. In the short term, this is likely to contribute positively to the bottom line, reflecting the surge in oil prices over the past two years — although current price levels are unlikely to be sustained.
Of the risks to BP, I am a most concerned about the elephant in the room — namely, the company’s investment in Russian gas producer, Rosneft.
The contribution of Rosneft to BP’s profit figures last year was in the region of 10% and I am worried that the uncertainty regarding “tit for tat” sanctions between Russia and the West may have an impact on these numbers in 2022.
Other concerns include the ongoing reparations for the Gulf of Mexico oil spillage back in 2010. BP is committed to an 18-year compensation package, with $1.8bn alone set aside in 2022 for these payments.
On the bright side, the investment BP is making into low carbon energy, such as solar, wind and hydrogen, makes it one of the most proactive oil producers in terms of transformation towards the future of world energy production.
I have a very upbeat view on the potential combination of low carbon hydrogen and renewables as a practical way of accelerating the reduction of vehicle emissions — and I believe that BP will be well placed to capitalise on these changes.
In the short term, though, whether we like it or not, the world is not yet ready to depend completely on low carbon energy. BP recognises this, but at the same time it is making big steps to get its own house in order. Cost savings of $2.5bn last year and an $8bn debt reduction will make it fitter for the future.
All things considered, of all the major stocks in the oil and gas sector, BP is the most attractive for me just now.
Whilst I am positive about growth in the share price, in the short term I will be sitting back to watch how tensions in eastern Europe play out before investing.
