BP (LSE: BP) shares tend to follow the oil price, and that’s exactly what they’re doing today.
Israel’s strike on Iranian military facilities has sent Brent Crude racing past $74 a barrel. At the start of the month, it was closer to $60. That’s a rise of more than 20% in less than a fortnight.
The BP share price hasn’t climbed quite so fast, but it’s still up around 3% today, the second-best FTSE 100 performer after defence giant BAE Systems. It’s up 6% over the past week but down 18% over 12 months.
Oil price shock
The oil price has been down in the dumps but now analysts are scrambling to update their forecasts. Saxo reckons it could be heading for $80. If Iran closes the Straits of Hormuz, a bottleneck for oil tankers, it could go higher still.
So will the conflict escalate? Nobody knows. I think investors have to look beyond the noise and think longer term.
In my view, BP is no longer the core FTSE 100 holding it used to be. Climate change has forced the board to rethink its entire strategy as a half-hearted pivot to net zero left it in no-man’s land.
Also, the world has become less energy intensive. We still consume an incredible 105m barrels of oil every day, but we get more economic bang for each barrel. Plus we have more renewables
There are operational risks too as oil gets harder to access. Another disaster like 2010’s Gulf of Mexico blowout would damage the company for years.
Income keeps flowing
Despite all that, I started building a position in BP shares late last year. My average entry price was 414.5p. Today, the shares trade at 391p. So far I’m down, but I can live with that. No investor can expect to buy at the perfect time.
The sliding BP share price has pushed the trailing yield up to a generous 6.2%. Analysts expect it to hit 6.39% this year and 6.59% in 2026. I’ll reinvest every dividend.
On 29 April, BP reported underlying replacement cost profits of $1.38bn for the first quarter. That was below forecasts and well down on the $2.72bn booked a year earlier. It still beat the previous quarter’s $1.17bn though.
Net debt has risen, from $24.02bn to $26.97bn. That’s a concern, something broker Jefferies flagged up in May when it downgraded the stock. It warned of BP having to choose between hitting debt-reduction targets, scaling back share buybacks or slowing upstream investment.
Debt is a worry
BP is also diverting to raise cash to pay down debt. That’s a tricky proposition as the global economy struggles, but may get easier to deliver if crude stays elevated.
Analyst consensus currently sees the share price rising to 433p over 12 months. If true, that’s a gain of 11% from today, rising to a total return of 17% with dividends included. Not bad, but hardly a bull run.
Buying is a cyclical business in a cyclical market. The time to buy is when it’s down, as it has been lately. When BP flies, it can really fly. I think it’s worth considering, but only with a long-term view. And the acceptance that even if BP does enjoy a bull run, the ride is likely to be bumpy.
