Over the last 12 months, FTSE 100 oil major BP (LSE:BP) has returned 26p per share in dividends. So someone wanting a £1,000 a year second income currently needs 3,846 shares.
The dividend yield is 5.6%, which is well above the FTSE 100 average. But to figure out whether or not this is a good opportunity, investors need to think about how durable the return is likely to be.
Demand
An obvious question for investors looking at BP shares is what the long-term demand for oil is likely to look like. Unlike the US, the energy transition seems to be gaining momentum in the UK.
The infrastructure needed to support wind and solar as viable energy sources still needs to be built (and this will need oil). But more importantly, demand for power in general is increasing.
An obvious example is the rise of artificial intelligence (AI) where data centres have very high energy requirements. And one of the limiting factors at the moment is power.
Given this, I think the outlook for oil is reasonably positive. Aside from practical limitations, rising energy needs should make shifting away from hydrocarbons very difficult.
Reserves
If the need for oil stays strong, the obvious question is which companies have the reserves to meet this demand. And BP is in a pretty decent place.
At the start of the year, the firm had 6.25mmboe (million barrels of oil equivalent) in proved reserves. And based on H1 production rates, that should last just over 11 years.
That’s about in line with the industry average. And BP also has scope to replace the resources it extracts with new reserves through a combination of drilling and acquisitions.
The firm estimates its total hydrocarbon reserves (proved, probable, and possible) are around 11.35mmboe. That means more than 20 years of production at current rates.
Prices
The other big variable that determines BP’s financial performance is the price of oil. There’s a lot for investors to pay attention to here, but not much of it is under the company’s control.
For example, the US and Saudi Arabia – the two largest oil-producing countries – have both been increasing production levels recently. And increased supply isn’t a positive sign for prices.
This inevitably creates risk and oil prices can react sharply to things like political instability. But its worth noting that BP has relatively low production costs and these are a big advantage.
The firm has reported a breakeven price of around $40 for oil. Outside the Covid-19 pandemic, prices haven’t been this low in the last 10 years, so I think there’s clear reason for optimism.
Passive income
So are BP shares worth considering for investors looking for passive income? I think so – I have a positive view on the outlook for oil and I expect the firm to produce at a low cost for some time.
The FTSE 100 company’s ventures into renewable energy generation projects were disastrous for shareholders. But I like the firm much better with its focus solidly back on its core competencies.
The UK government’s windfall taxes on oil and gas businesses means BP isn’t my favourite oil stock. In terms of dividends, though, I think there’s a lot to like about it at today’s prices.
