Since 15 March 2023, the average daily closing BP (LSE:BP.) share price has been 486p. By coincidence, that’s the same price at which the oil giant’s shares are currently changing hands.
Looking back five years, its stock’s down around 10%, although it’s fluctuated wildly during this period.
I’m wondering, what direction will it go next?
A history lesson
Given that the majority of its income is earned from the extraction and sale of oil, it appears reasonable to assume that there’s a strong relationship between the company’s share price and the cost of a barrel of Brent crude.
Indeed, this can be seen from the chart below, which compares the movement in these two variables over the past 20 years.
Chart by TradingView
To try and gauge the direction of the company’s share price, it’s therefore necessary to know what’s going to happen to the oil price. And that’s where things get very difficult.
That’s because oil prices are influenced by the production decisions of OPEC+ member countries, regional conflicts and global demand. None of these factors are easy to predict.
In fact, some studies have found that assuming future oil prices will remain the same as they are now, is equally as reliable as more sophisticated forecasts!
For what it’s worth, Barclays, JP Morgan and Fitch Ratings are predicting an average price per barrel in 2024 of $93, $83 and $75 respectively.
A crystal ball
Energy stocks can therefore be volatile. To compensate for this risk, investors look for a reliable and steady stream of dividend income. BP’s shares are currently yielding 4.7%. While this is above the FTSE 100 average of 3.9%, there are many quality stocks presently paying more.
Personally, I don’t feel the yield is high enough to justify the risky nature of the company’s shares. BP’s directors will point to their share buyback programme as evidence of the company’s generosity towards its shareholders. But I’d rather have the cash in my hand.
And I’d question whether the $23.2bn the company’s spent since 2019 buying its own shares has really had much of an impact.
For example, compared to 30 June 2022, there are around 12% fewer shares in circulation. Yet the share price is largely unchanged.
Chart by TradingView
Based on the number of shares in issue at 31 December 2019, instead of the share buybacks, they could have returned an additional 90p (at current exchange rates) for each share held.
Cash is king
One thing that appears certain to me is that when commodity prices are in its favour, the oil giant will remain — in the words of its former chief executive — “a cash machine“.
And as the chart below illustrates, it has the potential to generate lots of it.
Chart by TradingView
Due to fluctuating energy prices, conventional measures of profitability aren’t necessarily useful when assessing oil companies. An an example, in 2022, BP recorded a loss after tax of $1.4bn. Yet it generated over $23bn of free cash.
Unfortunately, without a crystal ball to accurately tell me the future price of Brent crude, I’m unable to say how much cash BP will generate, and when. And that means — I must admit — I’ve no idea what’s going to happen to its share price.
