If I had invested in BP (LSE: BP) this time last year, I would be sitting on a handsome profit already. Not only has the BP share price risen 33% in that time, the oil major also pays a decent dividend. The yield is around 4%. If I had bought a year ago I would be earning an even higher yield now thanks to the lower purchase price back then.
So, can the good times keep rolling – and if so, ought I to invest at the moment?
Investing in oil and gas shares
In broad terms, I break down oil and gas companies into two groups.
The first groups sees companies developing potential energy projects in their early stages. Often they only have a small number of projects on the go, sometimes just one. If they strike oil or gas in a big way, these little companies can see their share prices soar. But there are clearly risks involved with such a concentration of business operations, which is why I avoid buying such shares.
A second group of energy companies includes the big boys like BP and Shell. They already have diversified portfolios of operational assets, as well as more speculative development projects. That means they are unlikely to skyrocket in value on the back of any single project performing well. But such companies benefit from a diversified income stream already in place from a variety of live projects. Last year, for example, BP pumped over 20 million barrels of oil (and equivalents) per day on average. That is a lot of oil!
By investing in a company like BP or Shell, I can get exposure to the energy market overall. But some energy majors perform better than others due to their asset base, strategy or cost structure. So what about BP?
Good not great
My concern with BP is that while it is run well, it is not ‘best in class’. If I want to expose my portfolio to energy, why choose BP rather than one of its rivals?
The company cut its dividend over the past couple of years at a time when US rivals like Exxon held theirs steady. It has also pushed hard into non-fossil fuels. I think that could be an important future growth area. But for now, I see it as a potentially distracting drag on overall profitability at the firm.
Last year, BP’s net profit margin (post-tax profit as a percentage as revenue) was 5.4%. Exxon’s was much higher, at 8.5%. The companies are based in different tax jurisdictions and one year is only a snapshot. But I think the marked difference in profit margins highlights BP’s less profitable mix of operations compared to rivals in which I could invest instead.
Oil price concerns
Still, BP’s profits of nearly $8.5bn after tax last year were still substantial. If energy prices remain high or climb further, I think the BP share price could keep rising.
Global energy prices are outside the firm’s control, however, unlike its strategic choices on the dividend and business mix. I also reckon that energy prices are likely to fall in coming years. That could hurt turnover and profits at energy companies including BP.
On that basis, I will not be adding BP shares to my portfolio.
