Near 484p, the BP (LSE: BP) share price is around 13% down since the beginning of March.
But to put that move in perspective, the stock is about 14% higher than a year ago.
And it’s up a mighty 146% since the lows of 2020.
One thing seems clear — BP has recovered from its pandemic bottom of 2020 and is now sitting in a familiar trading range. But it hasn’t been above 600p since as long ago as 2010.
Driven by commodity prices
BP aspires to transform itself into what it calls an integrated energy company. But the present reality is that most of its earnings are derived from producing and handling oil and gas products.
And that means the prevailing prices of those commodities affect the profit performance of the business. Investors need only compare the full-year accounts for 2021 and 2022 to see the truth of that statement.
Remember, prices first plunged and then soared because of the pandemic and the war in Ukraine. But they’ve eased back a bit since.
All of this means that BP’s business is cyclical. And a glance at the multi-year financial record shows the cyclicality in action.
Revenues, earnings, cash flow and shareholder dividends have all moved up and down from year to year. And one thing they don’t appear to do is move steadily higher over time.
Meanwhile, that trading range for the share price is another indicator of the firm’s cyclicality. And within that range, the stock has been volatile.
Lower earnings ahead
Looking ahead, the directors said in May they expect oil prices to remain elevated in the second quarter of the year. And that’s because of the recent decision to restrict production by the oil producers’ cartel, the Organisation of the Petroleum Exporting Countries (OPEC+).
That move will likely combine with strengthening demand from China, to tighten supply/demand balances.
And the directors think European gas and Asian liquified natural gas (LNG) prices will receive support from recovering Chinese demand as well. Further impetus will likely come from European storage capacity re-stocking and coal-to-gas switching in the US and in Europe.
But City analysts expect lower profits ahead for BP. They predict a decline in earnings of around 17% this year and about 5% in 2024. Although estimates may prove to be wrong. After all, who can accurately predict what commodity prices will do? Not me, that’s for sure.
But is the recent easing of the BP share price presenting investors with a buying opportunity? Not for me. Admittedly, the company has been doing well paying down its debts. And cash flows do look stable right now if the directors are right about the likely strength of commodity prices.
I’ve had short-term success in the past buying the stock near the lows of its multi-year trading range. For example, in 2010 when the company suffered its oil-spill disaster in the Gulf of Mexico.
But with earnings and the share price elevated today, I have no confidence that either dividends or the stock will keep rising in the years ahead. And to me, the risk of both falling from where they are today looks elevated. So I’m not convinced they’re a steal for investors avoiding BP shares for the time being.