There are plenty of reasons to be wary about the BP (LSE: BP) share price. This is a company that lost its way, making a reluctant push into renewables before rowing back with an almost audible sigh of relief.
Climate change has made oil and gas stocks politically charged, yet demand for fossil fuels still has a long way to run. That leaves BP walking a fine line between investing in the future and maximising today’s profits.
The shares jumped after Russia’s invasion of Ukraine in 2022 sent energy prices soaring, but retreated as Europe found other supply routes. They remain tied to every twist in geopolitics, global oil demand, production levels, inventory reports, and OPEC machinations. And that’s not likely to change.
Stock valuation puzzle
Over the last 12 months, the BP share price has risen just over 3%, and it’s still down 18% over two years. Despite that, the price-to-earnings (P/E) ratio suggests it’s massively overpriced, standing at an alarming 242. That’s distorted by a 97% drop in 2024 earnings. On a forward basis, the P/E looks more modest at 14.4.
Investors are also hoping CEO Murray Auchincloss can turn this floundering tanker around. Recent events have helped investor sentiment. These include drone strikes on Russian refineries that threatened supply, as well as BP’s biggest oil discovery in 25 years off Brazil’s shore.
Results snapshot
Second-quarter results, published on 5 August, offered some respite. While underlying replacement cost profit, a key earnings metric, fell almost 15% to $2.35bn, it still comfortably beat analyst forecasts of $1.81bn. The quarterly dividend was hiked 4% to 8.32 cents a share, while quarterly share buybacks continued at $750m.
Net debt is still close to $30bn, which isn’t ideal, but with annual revenues pushing $190bn last year, I’m not going to lose sleep over that. Auchincloss is looking to whittle that down, partly through disposals.
Upbeat analyst outlook
While the outlook is uncertain and should remain so, investors can look forward to dividends. The forecast yield is a pretty meaty 5.7% for 2025, rising to 5.91% in 2026.
Experts are upbeat about the shares. Consensus suggests the BP share price could climb 11.1% over the next year to 472p. That would deliver a potential total return of close to 16.8%, including the dividend. It hardly needs saying that forecasts cannot exactly be relied upon. Every stock involves risk. That’s the price we pay for potentially higher rewards.
What encourages me most is that out of 30 analysts, 13 currently rate BP a Buy, 16 a Hold, and only one says Sell. Given its strong yield, ongoing buybacks, and recent oil discovery, I think investors might consider buying. That is provided they’re comfortable with the volatility that comes with energy stocks.
Long-term investors should remember that success lies in sticking with a strategy, reinvesting dividends, and letting compound returns do the heavy lifting. It’s also worth brushing up on how to value shares to help make sense of oil majors when earnings swing wildly. As they will surely happen here. BP is no longer than no-brainer buy of yore, but I still think it’s pretty difficult to ignore. As is the dividend.
