We live in strange times in which BP (LSE: BP) shares can fall almost 10% in a week despite posting a better-than-expected Q1 profit of $5bn.
I’m beginning to sniff a buying opportunity here and while BP has challenges, I can see five good reasons to take advantage of this week’s share price slip.
1. The yield is climbing
BP, like fellow oil giant Shell, has been a FTSE 100 dividend income aristocrat for decades, with the two stocks typically yielding 5% or 6% a year.
Lately, BP’s yield has slipped to 3.9%, only slightly above the index average. The outlook is brighter, though, with a forecast yield of 6%. Better still, that’s covered 4.1 times earnings, which should give management scope to increase it in future.
While the dividend was held at 6.61 cents per share this week, the board did lift it by 10% in February. Free cash flow fell to $4bn from $5.3bn, but the dividend remains affordable.
2. There are buybacks too
Given the choice, I’d pick a dividend over a share buyback. There’s something appealing about getting a cash lump sum, plus there’s a danger executives give the green light to buybacks to boost their own bonuses.
Still, I’m not complaining about BP’s plan buy a further $1.75bn of its own shares over the next three months, on top of last quarter’s $2.75bn.
By shrinking the number of shares in circulation, it should boost the value of existing holdings, and I won’t complain too much about that.
3. The share price has slipped
BP shares have done well out of the energy shock, rising 17.59% over the last year. Over two years, they’re up a mighty 60.76%.
While that’s good news for existing shareholders, I’ve been wary about overpaying. This week’s dip presents the first buying opportunity I’ve seen in a while
4. Fossil fuels aren’t dead yet
BP has been repeatedly accused of being slow to make the shift to green energy and there’s some truth in that.
However, the balance shifted back in favour of fossil fuels after Vladimir Putin’s brutal invasion of Ukraine, which forced the West to wean itself off Russian oil and gas. BP still has to make the transition, but it now has a bit more breathing space.
5. It’s doing more than people think
While BP will continue to draw the ire of eco-campaigners, it’s making more progress than many people realise. It has just spent $1.3bn acquiring TravelCenters of America, which will bring growth opportunities for EV charging, biofuel and eventually, hydrogen.
BP is also partnering with Iberdrola and Uber on EV charging, and has several carbon capture and green hydrogen projects under way. The challenge will be making these as profitable as oil and gas
Inevitably, there are also risks to buying BP shares. Fossil fuel prices fell 15% in the first quarter. Underlying replacement cost profit, which measures headline profit from operations, plunged 19.4% to $5bn. Management expects refining margins to fall across the industry in the months ahead. Campaigners are pushing for another windfall tax.
Personally, I’d like BP shares to drift a little lower before buying them, but I’m probably being fussy. There are still some excellent reasons to buy the stock right now.
