Are BP shares about to take off?

Rupert Hargreaves explains why he thinks BP shares are primed to take off over the next decade as the company expands into green energy.

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It might seem strange to ask the question of whether or not BP (LSE: BP) shares are about to take off after the company’s recent performance. Indeed, over the past couple of months, the stock has outperformed the market.

Year-to-date shares in the company have returned 2% compared to a return of-5% for the FTSE All-Share index over the same period. These numbers imply the corporation has outperformed by 7%, excluding dividends.

However, I am not particularly bothered about the performance of BP shares over a couple of months. I am really interested in the company’s potential over the next five to 10 years.

That is why I am trying to figure out if the stock could be about to take off and outperform over the next decade rather than the next few months.

BP shares: 10-year outlook 

Whenever I try to assess if a company has the potential to outperform over the long term, I want to understand how it operates and whether or not it has a competitive advantage. In the case of BP, the business does not have much of a competitive advantage.

Its main products are oil and gas. These are traded on global commodity exchanges, so the company can not really set its own prices. It has to take what the market is willing to offer.

Still, what the business does have is scale. The group is one of the world’s largest private oil producers, which gives it significant economies of scale.

It also has a substantial foothold in the oil trading and refining markets. Moreover, management is spending billions of dollars building out the company’s green energy division.

I think this could be a key area for growth over the next decade as the world starts to move away from hydrocarbon energy toward renewable fuels such as wind and solar power.

In the most optimistic case, I think the demand for oil and gas will remain constant over the next decade. BP should be able to capitalise on this growth and use the profits from this business to invest in green energy.

At the same time, demand for green energy should grow. The enterprise will be able to capitalise on this market growth with its increasing green energy business.

As it invests more and develops this business further, income from the operation should only increase.

Risks ahead

Having said all of the above, there is no guarantee that oil and gas prices will remain at current levels indefinitely. The current surge in oil prices could drive a significant increase in output. This would put pressure on hydrocarbon prices in the long run.

More supply and steady demand could push prices lower. In this environment, BP shares may struggle to outperform the market. Despite this risk, I am optimistic about the company’s potential. I think it can capitalise on high oil prices today by reinvesting this money in green energy projects.

These projects should underpin the corporation’s future growth.

So while it is impossible to predict what will happen to share prices in the next few months, I think BP shares could push higher over the next 10 years as the company becomes one of the leading renewable energy investors in the world.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves 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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