The BP (LSE:BP) share price is up around 7% this year, comfortably outpacing the broader FTSE 100 index. The stock has had a fairly volatile few months, though, as geopolitical events have caused oil prices to shoot up.
As I write, the price of Brent crude is around $110. In order to break even, BP needs a price of around $35-$40. I think that the soaring price of Brent crude might be about to send BP shares higher.
Oil prices
The price of oil matters to BP. A lot. As a commodity producer, BP sells the oil it extracts at whatever the prevailing price is. Unlike say, Unilever, which attempts to use its brands to command a premium, BP has zero pricing power.
That means that expensive oil is good for business. As I understand it, the company needs the price of Brent crude oil to be above $40 in order to make a profit after its extraction costs have been subtracted. Oil prices at $110 give BP a huge opportunity.
Share buybacks
BP’s management has committed to using surplus cash to repurchase shares. In the 2021 end-of-year results, it said the following:
For 2022, and subject to maintaining a strong investment grade credit rating, BP is committed to using 60% of surplus cash flow for share buybacks and intends to allocate the remaining 40% to strengthen the balance sheet.
BP’s fourth quarter and full year 2021 results
On the basis of oil prices at around $60 per barrel, it anticipated being able to deliver share buybacks of around $4bn annually. If oil prices stay at $110 per barrel, the company might theoretically be able to achieve around three times this.
If its balance point is around $40, then $60 oil prices give it a $20 profit per barrel. At $110 per barrel, BP’s profit per barrel increases to around $70. This means that $110 oil could make around twice times as much cash available for share buybacks.
At $60 per barrel, BP anticipated repurchasing around $4bn in shares annually. With the company’s market cap around $93bn, I think that oil staying above $110 remaining high could even see it repurchasing around 10% of its outstanding shares in 2022.
Furthermore, management has committed to deploying 60% of excess cash into share buybacks. If the high oil price gives it a chance to do this, then I think that the BP share price will go higher.
So will it happen?
Oil prices are high at the moment because the geopolitical situation has constrained supply. I expect politicians to try to lower the cost of oil and I expect them to succeed. I therefore don’t think that the favourable situation for BP will last forever and that’s enough of a risk to the stock to put me off buying it for now.
Yet even if the price of Brent crude comes below $100, I think that BP’s buyback programme can push its share price higher over the next few years. Management’s projections are based on the price of oil reaching no higher than $60 going forward. So while I’m looking at other opportunities at the moment, I think that the company has significant scope to outperform, potentially driving the BP share price higher.
