Earnings season at the oil majors is big news these days. Today has been the turn of BP (LSE:BP) to report. Like its peer Shell, profits were the best in its 114-year history. However, while many investors continue to worry about the prospects for Big Oil on both a short- and long-term basis, I continue to advocate that BP’s share price remains firmly in bargain territory.
Record profits
For the financial year 2022, BP reported truly eye-watering numbers. Revenues increased by 50% to $280bn. Every segment contributed to these numbers. The standout performer was gas and low-carbon energy, which rocketed 82% compared to 2021.
Underlying profit more than doubled to $27.7bn. Operating cash flow surged 73% to reach $40.9bn. This metric is key to shareholders as the company is committed to returning 60% of surplus cash flows via share buybacks.
In Q4, the company completed $3.2bn of buybacks and intends to execute a further $2.75bn in Q1 of 2023.
In addition, it has increased its dividend 10% to 6.61 cents per share. That equates to a dividend yield of 4.5%.
However, despite these record figures, it continues to be run prudently. Net debt has now fallen for the 11th successive quarter. This means falling interest expense.
Big Oil isn’t dead
Yes, these are impressive figures. But the reason why I continue to be bullish on BP and contend that its share price is cheap, is because of its future prospects.
Oil is, and continues to be, the lubricant of the global economy. If a company in the tech space was generating the kind of profits that BP announced today, its share price would be trading at many multiples of what it is today.
The fact that it isn’t, is partly as a result of where most capital is being deployed today. The excess froth might have come off Big Tech stocks, but investors continue to buy the dip believing them to be a bargain. I disagree.
The cost of capital is rising. Inflation is still elevated. In such an environment, I would much prefer to park my cash in companies that are generating near-term profits. If oil stocks continue to outperform, I foresee an eventual stampede of capital into the space.
Risks
A clear risk of investing in BP is that the world could well have passed peak oil. The push by governments and society to accelerate the move to cleaner sources of energy, means it could be left with stranded assets in the future.
I believe that a switch to greener sources of energy is inevitable. What I disagree on is the timeframe. The rush to move away from hydrocarbons is laudable, but before it can happen, green energy needs to be scalable.
Disincentivising companies from investing in exploration and production won’t, I believe, solve the energy crisis. What it will do is ensure supply remains tight and bring about structural inflation.
Many will disagree with me. However, I’m comfortable taking a contrarian stance. After all, not following the crowd is what helped make Warren Buffett rich.
Therefore, whenever finances allow, I’ll continue to add to my position in BP.
