I had a dream about the BP (LSE: BP) share price last night. Actually, it was a bit of a nightmare, because so much has gone wrong for the FTSE 100 oil giant. Will I sleep more easily if I sell up?
These are tough times for BP. Over the last 15 years it’s faced the Deepwater Horizon disaster and subsequent costly clear-up, major write‑offs in Russia, leadership upheaval, a misfiring renewables transition and volatile profits and dividends. No wonder I couldn’t rest easy.
Volatile FTSE 100 stock
I woke up all ready to bail out then remembered something. It’s still a brilliant dividend income stock with a trailing yield of 5.6%. But is that enough to compensate for the volatile share price? BP shares are up just 1.3% in the last year, and down 10% over three.
I was still ready to sell BP and use the cash to top up my stake in FTSE 100 dividend hero Legal & General Group, but something stopped me. This morning, Brent crude nudged $65 a barrel amid renewed concerns over Venezuela, Iran, Ukraine and global supply. I expected the BP share price to climb with it, and junked my plans to sell.
But instead of rising, the shares went south as BP warned of an upcoming $5bn impairment charge in Q4, mainly related to its energy transition businesses and week oil trading. That’s so BP.
Energy stocks like BP are subject to shocks and surprises. Just look at what happened after Putin invaded Ukraine in 2022: the oil price exploded, BP shares followed, then both fell back as Europe weaned off Russian energy. The shares jumped last week when markets spotted a big opportunity in Venezuela, then quickly retreated when they un-spotted it.
Analysts are relatively upbeat about the year ahead, with a consensus one-year price target of 502p. If correct, that’s about 16% above today’s 432.5p. The forecast 5.8% yield gives a total return of 21.8%, which would turn a £10,000 investment into £12,180. Although given the swings I’ve outlined, this is far from guaranteed.
There are reasons to be upbeat about BP. It generated $27.3bn in operating cash flow in 2024, despite a decline in profits due to lower refining margins and trading results. As well as the dividend, the board has enough cash at its disposal to fund quarterly share buybacks of $750m.
Taking the long-term view
While the world’s slowly shifting towards renewables, it still needs oil and gas to manage the transition. Also, BP’s made some big discoveries lately, notably in Brazil.
Due to climate change concerns, many investors won’t want to touch BP at all. And BP’s been poorly managed for years. Turning this tanker around won’t be easy.
But I still think with a long-term view, so it’s worth considering as part of a balanced portfolio. I certainly won’t be selling, oil and gas is a key sector and I don’t have any other exposure to it.
As ever, it’s important to take a long-term view. The big question isn’t where BP shares go today or tomorrow, but in five or 10 years. For me, the income and long-term potential make it worth holding, even if the daily swings sometimes keep me awake at night.
