If I believed everything I’d read about the BP (LSE: BP) share price in recent years, I wouldn’t go anywhere near the stock.
By rights, the oil & gas giant should have been sunk by climate change and the rush into renewables. Few were convinced by chief executive Bernard Looney’s 2050 net zero strategy, or the group’s commitment to low-carbon energy and sustainability. As wind and solar got cheaper and the oil price fell, the BP share price only seemed to be heading in one direction.
Then Russia invaded Ukraine, and suddenly everyone had more immediate worries. With oil heading towards $120 a barrel, the BP share price has been going gangbusters. It is up almost a third over the last year. That’s despite posting a $24bn write down on its 19.75% stake in Russian oil major Rosneft, plus two other joint ventures.
The BP share price is rocketing
Nothing can stop the BP share price today. First quarter net earnings jumped from $2.63bn to $6.25bn, thrashing analysts’ expectations of $4.49bn. That’s its best performance in a decade. The board has responded by lavishing shareholders with cash. It completed share buybacks totalling $1.6bn in the first three months of this year, and plans a further $2.5bn in the current quarter.
That’s a bold but risky move, as it could provoke a backlash. There are heated demands for a windfall tax on FTSE 100 energy giants BP and Shell. So far, the government has rejected them, and investors don’t seem particularly rattled. If they were, the BP share price wouldn’t have jumped another 7.95% in the last week alone.
BP has even hit its debt reduction target one year early, as the cash flows and flows. The group has endured some tough years, but the action it took then is bearing fruit today. Its rigid cost control measures mean it now breaks even with oil at just $45. That explains the buyback bonanza. It also boosts the dividend outlook.
The forecast yield is now 4.4%. That will be covered a staggering 4.2 times by earnings, which leaves plenty of scope for progression. The BP share price now trades at 13.8 times earnings. With revenues set to rocket, its P/E is forecast to fall to just 5.4%. Operating margins are expected to jump from 8.6% to 12.1%.
BP can’t drill oil and gas forever
Naturally, there are threats. The cost of living crisis will only worsen. The more BP’s profits grow, the angrier campaigners will become. Climate change isn’t going away. BP is taking advantage of the Ukraine crisis to open new North Sea oil fields, but its opportunism could backfire. Management will have to pour money into wind power, hydrogen production and electric vehicle charging networks to silence climate critics and build a future beyond petroleum, to coin a phrase. That will be expensive and the rewards uncertain.
The BP share price is on a roll and yes, I’d possibly buy the stock today. But for long-term success, I’d also want management to show it can make the leap into renewables. It’s not there yet so I’m keeping it on my watchlist for now.
