It’s been a bright 10 days or so for the BP (LSE: BP) share price. And on Tuesday, the FTSE 100 stock jumped to its most expensive since mid-February, following the release of first-quarter financials.
Could it be argued that BP’s share price still looks too cheap? City analysts think the oil major’s earnings will rocket 148% year-on-year in 2022. This leaves the business trading on a rock-bottom forward price-to-earnings (P/E) ratio of 5.5 times.
BP’s share price also offers excellent value from an income perspective. A predicted 17.8p per share dividend for 2022 results in a large 4.4% yield. This comfortably beats the 3.7% FTSE 100 forward average.
Profits smash forecasts
BP is on a roll right now, thanks to elevated energy prices. Those financials on Monday showed underlying profits soared to $6.2bn in the three months to March. This was up significantly from $2.6bn in the same 2021 period.
Thanks to “exceptional oil and gas trading”, profits soared past broker expectations of $4.5bn. Brent oil prices soared to 14-year highs, just below $130 per barrel in March on fears over supply shortages.
Why I worry about BP’s share price
BP’s shares are cheap. But as a long-term investor, I have major worries over buying in spite of those blow-out first-quarter numbers. These include:
#1: An incoming windfall tax?
The government has so far resisted calls to slap a windfall tax on oil companies like BP. But as the cost of living crisis worsens, the pressure to act is likely to rise.
BP is a highly cash-generative business. This is reflected in the company’s decision to lift first quarter dividends this week and to launch a $2.5bn share buyback programme.
However, as analyst Ian McLelland of Edison comments: “[Monday’s] announcement may further fuel calls for a windfall tax on oil company profits.” I worry that future shareholder returns could suffer as a result.
#2: Clean energy concerns
Demand for renewable energy sources is climbing as fears over the climate crisis worsen. So BP and other oil majors are trying to boost their presence in this area.
BP is investing heavily in offshore wind and intends to set up a green hydrogen plant in Rotterdam too. It has also teamed up with Volskwagen to roll out 8,000 electric vehicle charging points in Europe by 2024.
This could prove a highly lucrative strategy for BP. But I worry about the huge costs this will bring to the business as it diversifies its operations.
Besides, oil will still be the main driver of BP’s profits for many years to come. And this creates huge risks as the clean energy revolution accelerates.
The verdict
It’s my belief that, on balance, the risks of owning BP shares outweigh the potential benefits. Oil prices could leap again in the near future as the war in Ukraine continues. And this might push BP’s share price higher again.
Still, over a long-term horizon, I think the dangers of owning this share are much too high. I’d much rather buy other dividend-paying energy stocks right now.
