With investors warming again to oil & gas companies, BP (LSE:BP.) shares have enjoyed quite an impressive run over the last five years. The share price alone has climbed 68%. And when throwing in the extra gains from dividends paid along the way, shareholders have been rewarded with a total return of 117%!
The FTSE 100‘s also been a fairly strong performer since 2020, delivering a total return of 86% over the same period. But that still puts BP shares ahead by a notable margin.
As such, stock pickers who invested £20,000 into the energy enterprise in September 2020 now have around £43,400 in their pockets compared to the £37,200 of passive index investors. So can the oil & gas giant continue to outperform?
What the experts are saying
As a popular FTSE stock, BP shares often get a lot of attention from institutional investors and analysts alike. And right now, there are 24 professional firms that have shared their opinions on the business, most of whom seem to be fairly neutral, with 16 Hold recommendations as of 3 September.
However, there are some bulls among the crowd. For example, the analyst team at Barclays believe that management’s strategic shift back towards fossil fuels and the slower rollout of renewables will provide far more stable income.
Providing BP meets its new production target of 2.5 million barrels per day by 2030 as well as delivers its 16% return on capital goal by 2027, the analysts have estimated the firm’s intrinsic value at 525p. That’s around 21% higher than current levels. And when combined with the 5.5% dividend yield on offer today, BP shares appear to offer attractive growth and income prospects for investors.
What to watch
Barclays’ forecast is among the most optimistic right now. It assumes perfect execution from BP’s management with no unforeseen spanners being thrown into the works. Sadly, there’s just no way to guarantee that.
Oil & gas prices are constantly fluctuating. And this volatility has only increased on the back of brewing geopolitical tensions. Given BP’s production efforts incur significant fixed costs, sudden swings in oil prices could result in lumpy cash flows that could interrupt dividend and share buyback programmes. Even more so, given that the group’s seemingly prioritising debt reduction.
At the same time, while investors are largely praising the pivot back towards fossil fuels, it does introduce long-term uncertainty as governments are increasingly prioritising renewable energy sources. This is actually a risk factor that bullish Barclays has highlighted. And it could help explain why other institutional analysts are being a bit more conservative with their forecasts.
The bottom line
BP’s leadership team seems to be making the right moves to steer the business back on track and catch its rivals. Cost-cutting efforts have already started delivering results, with $1.7bn of savings delivered out of the $5bn targeted by 2027.
That’s obviously encouraging, but when looking at where BP shares are trading today, these future gains seem to already be baked into the share price. Therefore, even with Barclays’ optimism in mind, I’m not rushing to buy BP shares right now.
