In April 2010, just before the Deepwater Horizon explosion in the Gulf of Mexico, the BP (LSE:BP.) share price was close to 650p, around 50% more than it is today (2 October). Eleven workers tragically lost their lives on the rig and it’s been estimated that the disaster has cost the energy giant around $65bn in fines, compensation and clean-up costs.
Since then, the group’s stock market valuation has ebbed and flowed in line with the price of oil. Most notably, the pandemic saw energy prices plummet as global demand fell sharply. And after Russia invaded Ukraine in February 2022, Brent crude spiked and then steadily climbed higher.
Over the past 15 years, there have been numerous peaks and troughs as oil traders respond to various economic and political uncertainties.
Oil price trends are important because the majority of BP’s income is earned from the sale of the commodity. This means the group’s cash flow’s heavily influenced by the price of ‘black gold’.
Too good to be true?
As a shareholder in the group, I was particularly interested in one forecast I recently came across. Gov Capital has created an algorithm that considers “volume changes, price changes, market cycles [and] similar commodities” to come up with a five-year Brent crude forecast of $177.
If correct, it would be 20% more than its all-time high of $147.50 achieved in July 2008. And I reckon BP’s annual operating cash flow would be close to $60bn. This is based on data from 2018-2024, which shows a 96% relationship between the price of Brent crude and the cash generated by the group.
| Year | Brent crude ($ per barrel) | Net cash from operating activities ($bn) |
|---|---|---|
| 2018 | 71.34 | 22.9 |
| 2019 | 64.30 | 25.8 |
| 2020 | 41.96 | 12.2 |
| 2021 | 70.86 | 23.6 |
| 2022 | 100.3 | 40.9 |
| 2023 | 82.49 | 32.0 |
| 2024 | 80.52 | 27.3 |
If a price of $177 was realised in 2030, I think the group’s share price would easily double.
A mug’s game
However, the forecast comes with two warnings. Firstly, it’s very much an outlier. And secondly, as Gov Capital admits, it shouldn’t be used for investment decisions. That’s because it’s impossible to accurately predict future oil prices. There are too many random factors involved to make the exercise worthwhile.
But it is useful to consider long-term trends. As we move towards a cleaner world, demand for hydrocarbons will inevitably fall. This should put downwards pressure on prices. However, energy markets are very different to others. OPEC+ is a legal cartel – accounting for around 60% of global output — that seeks to restrict supply to keep prices up. In my opinion, the producers have the upper hand, certainly in the short term.
Final thoughts
To help improve earnings, the group’s planning to cut costs. A major shareholder is piling on the pressure for it to become more efficient. BP also wants to increase output. This has been helped by recent news of its largest oil and gas discovery this century, off the coast of Brazil. Raising production and reducing costs are two ways of achieving some protection from lower oil prices.
In addition, those looking for passive income might be tempted by its current dividend yield of 5.5%. Of course, there can be no guarantees when it comes to shareholder returns.
For these reasons, I believe BP’s a stock that investors could consider. Although, anyone taking a stake needs to be aware of the volatile nature of the group’s earnings as well as the operational challenges the industry faces.
