The BP (LSE: BP) share price has been rising recently as the company’s outlook has started to improve. Year-to-date, the stock has increased in value by 24%, excluding dividends. Over the past 12 months, shares in the oil and gas giant have increased in value by 2%.
Even after this performance, there are at least three reasons why I would buy the stock for my portfolio today.
Rising oil prices
The first reason why I would buy shares in BP today is that oil prices have been rising recently. Rising demand for oil and gas products and lower output have sent oil prices to a three-year high.
I think this could provide a strong tailwind for BP, which is not only one of the world’s largest oil and gas producers, but also a prominent trader of oil and oil products.
Rising oil prices will also provide BP with more capital to invest in its future growth plans.
The company is looking to invest tens of billions of dollars over the next few years to increase its renewable energy output. BP aims to establish a pipeline of renewable energy projects totalling 20GW by 2025 and 50GW by the end of the decade.
To that end, the group recently acquired a pipeline of US solar farms capable of powering more than 1.7m homes for more than $220m.
The company also has joint ventures to develop wind farms in the North Sea.
BP share price on offer
As well as the reasons outlined above, I also think shares in the oil and gas giant look cheap compared to its potential.
As oil prices have surged over the past few months, City analysts have more than doubled their earnings estimates for the company in 2021.
BP is now projected to report earnings per share of 33.6p for this year. That puts the stock on a forward price-to-earnings (P/E) multiple of just 8.9. I think that looks cheap compared to the company’s growth potential. The stock also offers a market-beating dividend yield of 4.7%.
Risks and challenges
I think the BP share price look attractive as an investment, but I don’t think it will be plain sailing for the group from here.
The company’s renewable energy ambitions will be incredibly costly. Unfortunately, there’s no guarantee the group will ever earn a return on its investment.
Further, oil and gas prices can be incredibly volatile. Oil prices have been rising over the past few months, but that could change quickly if the OPEC group of producers starts to increase production. If it does, oil prices could fall, forcing city analysts to revisit their growth expectations for the group.
Still, even after taking these risks into account, I think the BP share price has enormous potential. That’s why I would buy it.
Rupert Hargreaves 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.