The BP (LSE:BP.) share price has recovered strongly since President Trump upset the world’s stock markets in April with his announcements on tariffs. However, although up a third since its 12-month low, the stock’s now changing hands for the same price as it was in August 2024.
And this topsy-turvy performance is a reminder of one of the major risks associated with oil and gas shares. Because of the unpredictable nature of energy prices, nobody can tell with any certainty what’s going to happen next.
Of course, this is true of any share. After all, it’s impossible to see into the future. But S&P Global undertook a major study of US stocks in the 2000s and found that the energy sector was the most volatile of all. Over the past five years, the Financial Times reckons the BP share price has been 36.8% more erratic than the stock market as a whole.
This is not surprising given the wide range of influences on commodity prices. I recently read an article that identified 36 factors that impact oil prices. These range from some of the more obvious things like supply and demand – the former being affected to a large extent by the decisions of OPEC+ — to more subtle influences like refinery shutdowns and the actions of speculators.
However, despite this unpredictability, there are two reasons why I own BP shares.
Good for income
First, I like its dividend.
For the first quarter of its 2020 financial year, it paid 10.50 cents a share. Then, as a reminder that there are never any guarantees when it comes to shareholder returns, it was cut by 50%. Ever since, it’s been steadily increasing and is now at 8.32 cents (6.18p).
Based on today’s (29 August) share price of 433p, this implies a yield of 5.7%. This puts it just outside the top 10 of FTSE 100 dividend payers. But my yield is slightly better than this because I bought when the share price was lower than it is today.
Untapped potential
I also believe that BP is underperforming compared to some of its rivals. And this was the second reason why I took a position. Irrespective of what happens to oil and gas prices — all companies in the sector are largely affected in the same way – if BP could get its act together then it should be able to attract a higher valuation, one that’s more in line with some of its peers.
The accounts of energy companies can be complicated and not easily compared. However, looking at operating cash (something that’s straightforward to measure) relative to market cap, BP lags behind, for example, Shell. But, if the gap could be closed, it would be valued 9% more highly.
| Stock | Market cap (£m) | 12-months operating cash flow (£m) | Ratio |
|---|---|---|---|
| Shell | 135,994 | 36,447 | 3.73 |
| BP | 59,259 | 17,303 | 3.42 |
Even though it’s smaller, BP employs more staff than Shell and, taking into account their respective sizes, its administrative and operating costs are higher.
Activist investor Elliott Investment Management is pushing for changes to be made to make the group more efficient. BP’s managing director appears to be listening so I’m hopeful that its financial performance will soon improve.
That’s why I took a position earlier this year and why likeminded investors could consider adding the stock to their own portfolios.
