I don’t directly hold BP (LSE: BP) shares, although I have spent much of this year wishing that I did.
The energy shock has been a nightmare for most of us, but much better news for the FTSE 100 oil giant. Its share price is up 37.72% year-to-date, easily outstripping the index as a whole, which has fallen 4.71% so far in 2022.
Yet investing is cyclical, and I’m always reluctant to buy a stock when its high and rising. All good things come to an end, and all that.
BP shares are flying
Despite its success, BP doesn’t look particularly expensive. It currently trades at 14.9 times earnings. Once forecast earnings are entered into the calculation, the P/E falls to just four times. This reflects how quickly its revenues are rising at the moment.
On Monday, BP reported Q3 underlying replacement cost profits of $8.15bn, a rise of 145% from last year’s $3.32bn. This marked a slight drop on Q2’s $8.45bn but with a barrel of Brent crude hovering just below $100, the revenues should continue to roll.
Success brings enemies, however. Calls for a more punitive windfall tax on ‘excessive profits’ have redoubled. Activists are now calling for shareholder buybacks to be taxed, as BP returns $2.5bn to shareholders in this way.
Chancellor Jeremy Hunt is drawing up plans to slash spending and raise taxes, ahead of his autumn statement on 17 November. With a £30bn fiscal black hole to fill, FTSE 100 oil companies could be on his hit list. Yet so far investors do not seem worried, with the BP share price edging up another 4.48% in the last week.
BP also stands accused of failing to make a fast enough shift towards renewables. Activist pressure will intensify here, too. CEO Bernard Looney talks of striking a balance between “providing the oil and gas the world needs today while at the same time investing to accelerate the energy transition”. It seems to me that the former remains a higher priority than the later. BP could do more, but I’m not underestimating the challenges, either.
It isn’t easy going green
BP faces three main threats. Oil prices could fall. Taxes could toughen. And it needs to raise its green game. My fear is that we are witnessing peak BP, for the current cycle at least. The company carries net debt of $22bn, but that seems a minor worry today. As CMC Markets points out, it is using 60% of its surplus cash flow for share buybacks, and only 40% to strengthen the balance sheet.
The FTSE 100 is packed full of top stocks offering yields of 6%, 7%, or 8%. BP’s yield looks modest by comparison, in part because its share price has climbed this year, rather than fallen. Right now, it offers a forecast yield of 4.4%, covered a ridiculous six times by earnings.
I’d like to include BP shares in my portfolio, yet I am wary about buying them today. I don’t expect BP to crash, but further upside may be limited.
Instead, I will wait until investors hate BP, along with all those angry activists. That will be a safer time to buy.
