BP (LSE: BP) shares are up by 3%, as I write, after the energy group reported a first-quarter profit of $6.2bn, its highest for 10 years.
The BP share price has already doubled from its 2020 lows of under 200p, but the shares still offer an attractive 4.6% dividend yield and may not be expensive. Should I consider buying the shares for my portfolio, or have I left it too late?
Why is BP doing so well?
It’s no coincidence that BP’s profits have hit their highest levels for a decade. Oil prices are over $100 per barrel. Gas prices are high too. As a commodity producer, BP is simply benefiting from these high prices.
Ahead of today’s quarterly results, City analysts expected BP to report underlying earnings of more than $17bn this year. I suspect these forecasts may now rise, as today’s profits were higher than expected.
BP’s strong performance means the company’s share price of 400p values the business on just five times forecast earnings. That’s unusually cheap for a profitable company.
Are BP shares a potential bargain? Here’s what I think.
BP shares: what could go wrong?
The war in Ukraine has pushed oil and gas prices higher, as the market fears the loss of Russian supplies. This is one factor behind BP’s turbocharged earnings.
However, BP has previously made a lot of money from its investments in Russia. In 2021, 12% of BP’s profits came from its 20% shareholding in Russian group Rosneft.
BP has now decided to exit its Russian investment and has written off the value of its Rosneft shares. These were previously valued at $14bn.
While oil and gas prices remain high, BP won’t really miss its Russian earnings. But when energy prices return to more normal levels, their loss could have a bigger impact.
Would I buy BP shares today?
I think that losing its business in Russia should be manageable for BP. But I suspect the transition to low carbon energy could be tougher. BP has previously promised to cut oil and gas production by 40% by 2030.
At the same time, the company says it will invest up to £18bn in UK energy by 2030. This will include North Sea oil and gas projects, as well as renewable projects such as wind farms and hydrogen production.
We don’t know how these changing priorities will affect BP’s profits in years to come. In my view, a lot will depend on energy prices.
I don’t think it’s safe to assume that BP will be able to continue growing in the future. I think it could actually become a smaller business.
BP shares may seem cheap today, trading on five times forecast earnings. But I think this reflects the risks that profits may be about to peak and could fall sharply. Broker forecasts suggest BP’s profits could fall by one third over the next two years.
BP’s share price could continue to rise for a little longer yet, while energy prices stay high. But on a medium-term view, I think BP’s share price is high enough. I don’t see a big opportunity here, so I won’t buy BP shares right now.
