In the middle of August, I wrote an article explaining why I believed the BP (LSE: BP) share price was set for some explosive gains. I described why I thought the combination of rising oil prices and more investment in renewable energy would attract investors back to the enterprise.
As it turns out, I was right on the money. Shares in the oil and gas giant have returned more than 20% since I penned that article. Over the past year, the stock’s returned 68%, excluding dividends.
I think this could be a sign of things to come. The oil price has surpassed all expectations over the past few weeks and, as the market remains tight, it doesn’t look as if prices will stop their relentless march higher anytime soon.
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This could be great news for BP, one of the world’s largest publicly-traded oil companies.
The BP share price outlook
Rising oil prices will help BP’s bottom line, but I’m more excited about the company’s future potential. It’s clear to me that the world is moving away from hydrocarbon energy towards renewable energy. While it’s unclear what the energy market will look like 10 years from now, I think clean, green energy will make up the bulk of the market.
The cost of generating green energy’s plunging and, in many regions, it’s already cheaper than oil and gas. At the same time, it’s far safer and more predictable.
The returns from renewable energy projects for BP are lower than oil and gas, but they’re more stable. That explains why the company wants to boost its capacity to generate electricity from renewable sources to 50Gw.
At the same time, the group’s looking to offload $25bn of fossil fuel projects. BP has already divested legacy projects worth about $15bn.
The higher oil price should allow the firm to achieve better sale prices for these hydrocarbon assets. That will provide more capital for the group to reinvest and should help improve sentiment towards the BP share price.
It will also reduce the company’s dependence on volatile oil and gas prices. Returns from its solar projects average between 8% and 10% a year, which is lower than oil and gas projects, but it’s predictable. Historically, investors have been willing to pay a higher premium for stable returns rather than volatile cyclical returns.
Predictable returns
This is the primary reason why I think the BP share price will continue to push higher. As management sells hydrocarbon assets and reinvests the proceeds into renewable assets, the company’s makeup will change. This may open the door to a different group of investors who are more interested in stable, predictable returns.
That said, there’s a risk that by divesting fossil fuel assets, the group will miss out on further oil price gains. It may also struggle to achieve high returns in the renewable sector as money floods the industry. I’ll be keeping an eye on these challenges as we advance.
Nevertheless, despite these risks, I think the BP share price has plenty left in the tank. That’s why I’d buy the stock for my portfolio today.
