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Will the BP share price keep climbing?

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The BP (LSE: BP) share price is up by 46% so far this year. The firm’s latest gains came on Tuesday after the company said it would hit debt reduction targets sooner than expected.

This news sent BP stock up by nearly 4% on the day as management has promised to start returning cash to shareholders through share buybacks when net debt falls below the firm’s $35bn target level.

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Although BP shares are still down compared to one year ago, this year’s gains have reduced the loss to just 10%. Including dividends, shareholders are close to breaking even on a one-year view.

I’ve said before that I think we’ll see a surprisingly strong recovery in oil and gas demand as the pandemic eases. Is now the time for me to buy BP shares? I’ve been taking a look.

Pumping out cash?

It seems that BP has enjoyed two helpful tailwinds so far this year.

The first is that the company has received payment for asset sales quicker than expected. In total, $4.7bn was received during the quarter. BP boss Bernard Looney had expected buyers to take longer to pay.

Why are they rushing to pay? I reckon the clue lies in the other part of today’s news.

According to Mr Looney, BP enjoyed “very strong business performance during the first quarter”. I’d guess the main reason for this is that the oil price has risen by nearly 50% over the last six months, as demand starts to recover.

All of this means that BP’s oil fields will be pumping out a lot more cash than they were a few months ago. If I were buying an oil field from BP, I’d be keen to complete the deal so I could take advantage of higher commodity prices.

Are further gains likely?

The strong performance of BP’s share price this year shows the oil and gas firm bouncing back from last year’s crash. The stock is now trading at more normal levels, so I’d expect further gains to be smaller.

Broker consensus forecasts price BP shares on 11 times 2021 earnings, falling to around 8.5 times 2022 earnings. There’s also a 5.2% dividend yield.

These ratios look about right to me, given that BP’s core oil business is expected to face a long-term decline.

BP share price: my decision

Will I buy BP shares for my portfolio though? Probably not.

Although the stock’s 5.2% dividend yield is attractive to me today, Mr Looney has indicated that the payout will be held flat for the foreseeable future. Any extra surplus cash will be returned through share buybacks instead.

Buybacks generally support the share price and help with future earnings growth. With fewer shares, earnings per share rise more quickly. But share buybacks won’t provide me with extra cash unless I sell.

A flat dividend means that the real value of the payout will fall each year, due to inflation.

I don’t know how successful BP will be in its mission to invest in renewables and cut emissions to net zero by 2050.

On balance, I think there’s a reasonable chance that BP’s share price could keep rising. But I’d rather enjoy a rising stream of cash dividends than rely on selling my shares for a higher price in the future.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.