Is the BP share price presenting investors with a buying opportunity?

With the BP share price down, is now a good opportunity to load up with the oil and gas giant’s shares to hold for the long term?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Two white male workmen working on site at an oil rig

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British bank notes and coins
Investing Articles

Should I buy M&G shares for the 9.8% dividend yield?

With the M&G dividend yield close to double digits, this existing shareholder explains why he'd happily buy more of the…

Read more »

British Isles on nautical map
Investing Articles

This cheap UK stock could rise 30%, the City says

Analysts covering Serco Group shares reckon they could rise by over a quarter. But is this UK stock a good…

Read more »

2024 year number handwritten on a sandy beach at sunrise
Investing Articles

Here’s how I’d aim for a million by investing £45 a day

Christopher Ruane thinks putting £45 a day into blue-chip shares could help him aim for a million. Here are some…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

I’d buy FTSE 100 shares in December before the next stock market rally!

Christopher Ruane explains why he would happily snap up cheap FTSE 100 shares between now and the end of the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

6% yield and 8% annual revenue growth! A passive income opportunity

Why not have the best of both worlds? Our writer explores a passive income opportunity with a 6% yield, bolstered…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’ve been loading up on this FTSE 250 share in November!

Christopher Ruane explains why he's been adding even more shares in this well-known FTSE 250 name to his portfolio this…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Down 30%, these cheap shares are on sale!

Cheap shares don’t mean anything to our analyst unless there’s real value in what he’s buying. Let’s see his Foolish…

Read more »

Photo of a man going through financial problems
Investing Articles

I can’t believe how far these FTSE 100 shares have fallen!

While the FTSE 100 is up 0.7% over six months, these five Footsie flops have collapsed 26% to 40%. But…

Read more »