2023 has been a tough period for many UK commodity stocks. While the journey has been a bumpy one for FTSE 100 stock BP (LSE:BP.), the oil giant has eked out modest gains in the year to date.
At 511p per share, BP’s share price has risen 6% since 1 January. However, at current prices the business still offers attractive all-round value, at least on paper.
The oil giant offers a 4.4% dividend yield for this year. This sits comfortably above the 3.7% average FTSE-listed shares. Moreover, its price-to-earnings (P/E) ratio sits at 6.7, less than half the UK blue-chip average of around 14 times.
So are BP shares a no-brainer buy at current prices?
Good news
Prices of most ‘hard’ commodities — in other words those raw materials that are mined or extracted — have wilted this year. With rising interest rates putting extra pressure on a spluttering global economy, the demand outlook for most raw material prices have declined.
Oil has bucked the trend, however. And that has lifted BP’s share price higher in recent months. The key Brent benchmark started the year around $82 per barrel and has just barged through the $90 barrier on supply concerns.
Crude costs usually follow other industrial commodities lower during tough economic times like today. But demand is holding up strongly and the International Energy Agency thinks global consumption will rise by 2.2m barrels a day, to 102.2m.
At the same time, news of shrinking supply continues to stream in, giving oil prices extra strength. Inventories in the US have just fallen to their lowest since December. And Saudi Arabia and Russia have announced plans to keep their production cuts in business until the end of the year.
Cash machine!
This all bodes well for owners of BP shares, who have already seen a lot of cash returned to them.
Even though underlying replacement cost profits ducked to $2.6bn in the first half from $8.5bn a year earlier, the company still hiked the interim dividend 10% year on year to 7.27 cents per share. It also launched a fresh $150 share buyback programme.
City analysts expect the oil giant to continue raising the dividend over the next few years at least. And so that FTSE 100-beating dividend yield for 2023 moves to an even-better 4.8% and 5% for 2024 and 2025 respectively.
Why I’m avoiding BP shares
Yet despite these bright numbers I’m not interested in buying BP shares today. And its not just because oil prices could suddenly tank if the economy crashes, or the government introduces new tax raids in the event of bumper profits.
My main concern is the company’s reluctance to enthusiastically embrace low-carbon energy. Sure, BP has exposure to renewable and alternative energy sources like wind and hydrogen. But these non-traditional operations generate just a fraction of group profits.
And the oil giant has no plans to significantly address this imbalance. In fact in February it trimmed its renewables investment target to $5bn by 2030. This is less than a third of what it plans to spend on oil and gas, and leaves the company’s future in jeopardy as the world moves towards cleaner sources.
This is why, as a long-term FTSE investor, I’d rather buy other shares right now.
