Should I buy BP shares or am I too late?

BP shares are up 35% over the last year amid soaring oil and gas prices. So should I buy and will the share price keep growing?

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BP (LSE:BP) shares have been on a steep upward trend this year despite Russia-related challenges. The share price is up 35% over the past 12 months, and up 21% since the beginning of the year. Considering that many stocks have been on a downward track this year, BP’s performance certainly stands out. So, should I buy BP shares or am I too late?

Why is the share price up?

In May, BP announced a massive first-quarter loss as it took a $24bn writedown on its decision to exit the Russian market. But there was some good news as underlying profits soared. Replacement cost profit, BP’s measure of net earnings, rose to $6.25bn, from $2.63bn a year ago. The figure far exceeded analysts’ expectations of $4.5bn as oil and gas prices soared. The enhanced underlying profits were complemented by the forecast that refining margins should remain elevated in Q2 due to ongoing supply disruptions, particularly in Russia and Europe.

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However, even before the trading update, it was clear that oil companies would be making sizeable profits in the current environment.

Should I buy?

BP is quite an attractive offering for a number of reasons. For one, it has a dividend yield of around 3.75%. That’s not brilliant but dividend coverage should be strong given the windfall profits this year. Equally, BP said in May that it would hold its dividend payments at the current level and committed to buying back $2.5bn of shares in the second quarter of 2022.

Also, BP doesn’t look particularly expensive. It’s got a price-to-earnings ratio of around 13.7 based on the previous year’s performance. Its forward P/E ratio — which is calculated on projected earnings — is as low as 4.6.

However, BP’s capacity to deliver its current level of underlying profits is dependent on high oil and gas prices. What’s happening next with the oil prices isn’t easy to predict. It looks unlikely that Russia-related pressures, which have been pushing prices up, will come to an end any time soon. But equally, we’re seeing a slowdown in growth in China and negative economic forecasts in Europe over the next two years. A small downtick in economic activity could be enough to shift from a situation of undersupply to oversupply.

There may also be some concern about windfall taxes on energy firms like BP and Shell as profits rise. While the government rejected the idea, Tesco CEO John Allan suggested it would be the right thing to do amid a cost of living crisis and said firms in the energy space would be expecting it.

So, will I buy? Actually no, despite some very positive metrics. I’m expecting to see some downward movement in the oil price soon, especially if China sustains its lockdowns to prevent the spread of Covid-19.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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