BP (LSE: BP) shares have climbed 40% over the past 12 months, after a big crash in the early Covid days.
The BP share price depends a lot on the price of oil. Curiously, while oil has declined from its summer peaks, BP shares have maintained their strength. So is the stock a buy at today’s buoyant levels?
Dividend
Strong oil in 2022 has helped BP’s balance sheet considerably. By the end of its third quarter, net debt was down to $22bn. That’s a lot of money, but it’s a good bit better than the $32bn a year previously.
The company is also engaged in a $2.5bn buyback programme. That’ll be helping with the current share price strength. And it should boost the yield on future dividends, with the cash spread across fewer shares.
Forecasts suggest a dividend yield of 4% for this year, rising over the next couple of years. Forecasters can’t have any idea where oil prices will go, and that creates serious uncertainty.
It highlights the risk side of the cash equation. The stuff might be rolling in this year, but another oil price slump could put the pressure on.
Still, over the long term, BP has been a reliable dividend payer. It might not offer the biggest yields, but cover by earnings should be strong.
Valuation
Despite this year’s rise, BP shares are on a low price-to-earnings (P/E) ratio. Forecasts put it in the five to six range over the next couple of years.
It’s perhaps hard to value oil and gas shares right now. But that’s only around a third of the FTSE 100‘s long-term average. And if the analysts are close to being accurate in their predictions, we could be looking at a dirt cheap stock here.
The big issue is the long-term outlook for the oil industry, and how long it will continue to be profitable. That concern is very real, but I wonder if investors are overdoing the fear. BP shares look priced for a quick end to oil consumption, and I just don’t see it.
Oil
And that’s my third reason investors might buy BP shares. It’s all about future profits from oil and the future of the entire energy industry. Some pundits are predicting oil demand to peak in 2026 and then start declining.
That might prove accurate, though I’d be surprised if it comes as quickly as that. But the key thing is that that’s the peak, not the end. I think oil consumption could continue for a lot longer than most people think.
Even then, the decline of oil won’t be the end of BP. The company has been in transition for a few years already, and it has the financial muscle to ramp up its renewable energy business rapidly. It’s recently agreed to acquire Archaea Energy, for example, a leading US biogas producer.
This surely presents the biggest uncertainty, mind. Even if I think BP can become a leading clean energy producer, I still see plenty of risk along the way. But that low share valuation is tempting.
