Over the past six months, the BP (LSE: BP) share price has risen an impressive 27%, and over a year it’s up 18%, currently sitting at 378p. While this has meant some healthy returns for investors, it’s still a way off of the pre-pandemic share price. That being said, with the price of oil closing in on the $100 mark, are BP shares the next growth opportunity for my portfolio today? Or should I steer clear of the UK oil and gas giant? Let’s take a closer look.
The bull case for BP shares
BP released its 2021 full-year results on February 8. The $12.8bn profit figure stood out immediately to investors, and the share price rose over 4% in the days after the release. By comparison, in 2020, BP saw a $5.7bn loss, the latest figure highlighting the turnaround for the firm. It also announced it had reduced net debt for the seventh consecutive quarter. In my eyes, both these factors highlight the managerial strength of the business, which encourages me to buy the shares.
These impressive results helped boost analyst expectations. JP Morgan increased its target from 590p to 600p, with Morgan Stanley also raising its target from 401p to 465p. As mentioned, the current price is just 378p. This gives me confidence that the shares could be a great long-term investment for my portfolio.
Considering the value of its shares, BP is trading on a forward price-to-earnings ratio of 6.6. This seems good value to me, especially considering the recent high profits. Competitors Shell and ExxonMobil are currently trading with 7.7 and 12.3 P/E ratios, respectively. This suggests to me that the current BP share price is undervalued.
BP share price: bear case
An obvious risk I see for BP shares is the global shift towards net zero and increasing ESG concerns among companies. Although BP has made a concerted effort towards cutting emissions, moving forward it’s going to take a huge amount of investment to keep these projects up. The firm already operates with very slim margins, which will come under pressure from outward investment.
In addition to this, the nature of BP’s business is very cyclical. At the moment, commodity prices are soaring, which is great for the business. However, if oil and gas prices crash, the company is in big trouble. This gives it an element of uncertainty in the long term.
BP announced yesterday its plans to divest its 19.75% stake in Russian oil giant Rosneft, following the Russian invasion of Ukraine. This is expected to result in a costly $25bn in exit charges, largely from foreign exchange. Whilst it has insisted this won’t impact any of its long-term strategic and financial targets, it’s definitely a worrying cost.
The verdict
All things considered, I think that BP shares could be a great addition to my portfolio at its current price. The cheap valuation certainly looks appealing to me, especially considering the encouraging 2021 results. Therefore I would consider buying the shares for my portfolio today.
