The BP (LSE:BP) share price has had a topsy turvy 12 months. While the company’s value saw major dips in both March and October 2020, the shares have rebounded 24% in the last six months.
The onset of the Covid-19 pandemic was the primary cause of the first dip, while further lockdown restrictions coming last autumn also contributed to that second fall.
However, rising oil prices now appear to be driving the BP share price higher. How likely is this rise to continue though? Here’s what I think.
Oil prices
With oil prices falling to bargain basement prices during 2020, the profits of large oil producers such as BP took a hit. That came as demand for oil plummeted due to restrictions on large sections of global economies.
The company said it made a loss of $5.7bn when it posted its annual earnings report last month. That was even wider than the $4.8bn analysts had expected.
That comes in stark contrast to the $10bn profit it made in 2019. That’s a significant change in fortunes and one that BP will be desperate to turn around as soon as possible.
I think the events of the last year will accelerate BP’s move to diversify its energy sources. Some industry observers even think that we may have reached peak oil, and the UK’s push to become carbon neutral by 2050 means renewables will become increasingly important.
BP has already promised major cuts to its oil and gas production by 2030. It will divert that investment towards its target of building renewable energy capacity of 50 gigawatts by that time.
While those targets will be challenging no doubt, BP can count on heavyweight resources and decades of energy expertise to help it meet its goals.
Another reason I think BP might be a good addition to my portfolio is the fact that it pays out a healthy dividend to shareholders. Based on its current share price of 315p, the company’s dividend yield sits at 6.3%. That’s one of the highest payouts among FTSE 100 companies.
Stalling dividend growth
There are also reasons to be bearish on BP shares however. The dividend I referred to previously is unlikely to see growth over the next 12 months at least, due to the underlying performance of the business. So with the effects of inflation, the payout may not be worth as much in a year’s time.
Many investors prefer dividends to increase incrementally based on solid underlying performance.
Another factor I think could weigh on BP shares in the long term is the level of competition within the renewable energy sector. There are plenty of relatively new companies in the UK that have been set up with a sole focus on renewable energy at their core.
BP still has to manage its dependency on oil to strike a balance between profitability and its commitments to reducing emissions. With the competition in the renewables sector, there’s still uncertainty about how much of that market BP will be able to control.
However I think these are issues that the experience and expertise of BP within the energy sector should help it override. As a result, I see BP shares as a ‘buy’ right now.
