The BP (LSE: BP.) share price has been rising since 2020. Since the oil giant revealed its ‘net zero’ thing in the depths of the Covid crisis.
Net zero carbon by 2050? Aargh, the end of oil and gas, and time to sell out and move on! The sky came crashing down. But since those days, the shares have climbed back to pre-pandemic levels.
Oil is at $76 a barrel, BP is raking in profits, and on a 4.9% dividend yield. Is there more to come in the years ahead? I think so.
What’s the risk?
The risk to BP seems clear. It’s the end of the fossil fuels industry, at least as we know it. The surge in renewables makes it look like it could happen soon.
The anti-oil protestors on our screens all the time help to keep it fresh in our minds too.
And, high oil prices might just be a blip. The Middle East, the Red Sea… global crises can make oil prices very volatile.
We can’t forget that oil dropped well below $20 in 2020. If it hit those depths again, that could crush the BP share price.
Valuation
But I think BP could have many years of gains ahead of it. One reason is the current valuation.
Even after the rise since 2020, the price-to-earnings (P/E) ratio is still only six. That’s with oil prices a bit high, and they could well come down. But still, is that too cheap, or what?
It’s only about half the current FTSE 100 P/E. And that in turn is well below its long-term average.
The forecast dividends should be covered around three times by earnings. So I see room to cope with volatility there.
Long term
I also think the long-term threat to hydrocarbons is exaggerated. At least in terms of how many years we could still have left.
There’s just too huge an amount of energy in them. And big oil firms like BP are putting a lot into smarter ways of getting that energy than just burning the stuff.
After all, it’s the carbon dioxide produced by burning that’s the big problem.
Five years?
The next five years? If BP can keep its earnings stable and keep paying the dividend, I could see more share price growth.
Even a P/E rise to nine would mean a 50% gain, and it could still be cheap by Footsie standards. I think that’s possible.
Against that, all the fear and uncertainty could keep oil stock sentiment weak for years to come. So the other side of my optimistic 50% gain is that the BP share price could go nowhere. There must be a fair chance of that too.
Will I buy?
If I had to choose between buying BP shares and nothing, I’d buy.
But when I see stocks like Barclays on an even lower P/E, with no chance of the banking business being abandoned, I just don’t need to take the risk.
