Since 28 October of last year, BP (LSE:BP) shares have surged around 60%, making the oil giant one of the best performing FTSE 100 stocks in that time period.
The 60% surge has given shareholders more hope for the future. Because the stock has rallied a lot, the company now has more resources from a stock perspective to transition into green energy.
Given the rally, here’s why I think BP shares rose and what might be ahead for the company in the long term.
Potential reasons for BP shares surging
I reckon the primary reason for BP shares surging is straightforward. Oil prices have rallied substantially because the market expects strong global economic growth in the near future. Investors are optimistic that Covid-19 vaccine rollouts and government stimulus measures could bring more normalcy at some point.
As an oil company, BP benefits from higher oil prices. In terms of just how much a positive change in the Brent price benefits BP, the company’s operating environment rule of thumb gives some clues. For full-year 2020, each dollar increase in the upstream oil price of Brent would increase the pre-tax replacement cost operating profit by $340m.
Given that Brent prices have increased almost $10 per barrel from the average of the third quarter of 2020, BP’s annual run-rate pre-tax replacement cost operating profit has likely increased by over $3bn (according to the rule of thumb versus the third quarter). No matter how you slice it even with the taxes, that’s a pretty sizeable number given the British supermajor’s market cap of just $85bn.
The rise in the Brent price also has another additional benefit besides potentially increasing pre-tax replacement cost operating profits. According to its third-quarter transcript, the company is roughly half-way through its target divestment program of $25bn by 2025. That gives management still around billions of assets left to sell. If oil prices are higher, management could potentially find higher prices for its assets. If the company gets a higher price for its assets, it could potentially keep more value.
Green transition
In the long term, I reckon how well BP shares do will depend on how the company does in its green transition. It’s my view that BP will succeed, in part because they are a leading oil and gas company.
BP has a number of existing relationships with Fortune 500 companies. Because those leading companies trust BP for many of their energy needs, many may be willing to trust BP for their renewable energy needs too. As a result, I think BP could find it easier to expand in renewable energy than a green-only challenger. The selling is just easier.
Although shares have already rallied 60% from their lows of last year, I’d still buy and hold shares for the long term. I think the company will succeed in its green transition and the recent increases in oil prices will help BP make its green transition easier.
