The FTSE 100 oil giant BP (LSE: BP) has seen an almost 30% increase in share price over the past year. Since the start of 2022 alone it has risen some 15%. I think this is pretty significant considering the stock market uncertainty we have seen recently. The FTSE 100 index is actually trading below where it started the year.
BP share price rise due to oil
This is not unexpected, of course. Even before the Russian invasion of Ukraine, oil prices were rising fast. And now they are even more elevated. Crude oil prices have mostly traded north of $100 per barrel since March. In the short-term at least, they are expected to remain firm as well.
This could be a positive for the BP share price. Of the various analyst forecasts I have looked at, there is a consensus on further increase. I imagine this has a lot to do with the company’s healthy financials. It reported a significant increase in underlying profits in the first quarter of 2022, though its headline numbers were impacted by its exit from its key Russian interests.
Healthy passive income
It also helps that it has a healthy dividend yield of 4.4%, higher than the 3.9% for FTSE 100 stocks on average. In other words, it appears to be a good investment for now from both the perspective of growth in capital and passive income.
Windfall tax likely
However, the stock is also carries some very serious risks, in my view. There is the possibility of a windfall tax on oil companies. I think the likelihood is high at the present time when governments around the world are struggling with large debts acquired to support the economy through the pandemic. And more support might be required now as scorching inflation depletes real income and threatens to derail the economy from its course.
Slowdown could affect BP
Which brings me to the second risk. Growth is already challenged. The UK economy shrank in March from the month before after showing no growth in February. It has made some progress since the pandemic, but is has grown only 1.2%. Considering the amount of time already lost due to Covid-19-driven lockdowns, this is significantly less than desirable. If the economy continues to go in the reverse, even this progress will be lost. And that will eventually impact many companies, including BP.
Pivot towards renewable energy
Finally, over the long term, the future of big oil is anyway far from bullish. There is increased focus on renewable energy. Recognising this, BP has started pivoting towards investments in these energy sources. As an investor in the stock, I keep getting alerts regularly on its consistent efforts in the direction. For now though, its mainstay is fossil fuels.
What I’d do
In the medium term, I expect that the BP share price could continue to make strides, provided we do not find ourselves in a prolonged period of low or no growth. But for it to truly retain its status as an energy biggie for the long term, I would like to see more of its revenues from clean energy sources over time. And that is the one key factor I would look for when considering holding it for the next decade.