The upward trajectory of commodity stocks has suddenly gone into reverse recently. The BP (LSE: BP) share price is down 15% over the past couple of weeks alone. The sell-off has been triggered by increasing fears of a global recession as economies struggle to rein in soaring inflation.
However, despite the recent wobble in the price of brent crude, I continue to remain bullish on the oil and gas sector. Indeed, I believe the recent sell-off has presented me with an incredible buying opportunity.
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Free cash flow king
For the first quarter of 2022, BP generated an operating profit of $8.2bn whilst free cash flow stood at $4.2bn. With impressive figures like this, it is unsurprising that CEO Bernard Looney described BP as a ‘cash machine’.
As a result of these bumper results, shareholder distributions have been accelerated. The dividend per share stands at 5.46 cents. At today’s share price, that equates to a juicy 4.7% yield.
Additionally, the company has instigated a huge share buyback programme. In Q1 alone, it executed $1.6bn. Before the release of its Q2 results in August, it expects to have bought back a further $2.5bn. A lowering of the total number of shares in circulation is great news for shareholders as they end up owning a greater proportion of the overall remaining pie.
Investor sentiment toward BP
The narrative surrounding BP has changed recently. A couple of years ago, it was feared that the energy transition would leave it with stranded assets that dominated investor thinking. The energy crisis has highlighted that oil and gas is likely to be around for many decades to come.
Today, the narrative is very much focused around peak oil. As the oil price has surged, the BP share price has seen a meteoric rise. Therefore, the argument goes, why invest in a company that has already seen significant share-price appreciation? Surely, there isn’t much room for it go higher? Well, actually, I believe there is.
Commodities super cycle
There are a number of reasons why I believe that we are at the beginning, rather than the end, of a commodities bull market.
The first relates to strategic petroleum reserves. Today, they are at a multi-decade low as the US administration has been releasing it in an attempt to increase supply. To date, it has had little effect on crude prices.
Secondly, increasing geopolitical tensions across the globe are turning oil into an asset of strategic importance. The war in Ukraine is predominant here. But the spillover is now leading to tensions between the EU and Russia. And, of course, tensions between the US and China on a number of fronts are a continuing concern.
Thirdly, the overall investment in oil and gas. This remains at a historically low level relative to the price of oil. BP, for example, hasn’t opened an exploratory well for nearly five years.
The lack of investment comes down to a number of reasons, one of them being the environmental, social and governance (ESG) agenda. Further, I believe the windfall tax could end up further hurting much-needed investment.
In summary, I believe the investment case for BP is one of the most bullish in its entire history. That is why I intend to buy more shares on the recent dip.