Key points
- The BP share price is up 55% in 12 months
- Profits have been pumped up by high oil and gas prices
- It also has a growing focus on low-carbon energy
The BP (LSE: BP) share price has risen by more than 55% over the last year, as oil and gas prices have soared. This FTSE 100 stalwart generated an underlying profit of $12.8bn last year — the highest for eight years.
BP’s recovery has come as it’s promised to cut oil and gas production and invest more in low-carbon energy. I’m wondering if buying BP shares for my portfolio would enable me to profit from oil today and renewable energy in the future. Here’s what I’ve decided.
Changes are coming… slowly
Oil and gas production that was cut during the pandemic has not yet been fully restored. However, demand has bounced back strongly as life has returned to normal around the world. This has led to high oil and gas prices, with bumper profits for big producers like BP.
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Although the company plans to cut oil and gas production by 40% by 2030, cash profits from this part of the business are expected to remain stable, at $30bn-$35bn.
This compares to expected 2030 profits of $9bn-$10bn from service stations, and just $2bn-$3bn from renewable energy.
These numbers suggest to me BP is still likely to make around three-quarters of its profits from oil and gas by 2030. This 110-year-old business isn’t going to abandon petroleum too quickly.
I’m watching the cycle
I think BP is performing well at the moment. But I’d guess that’s not difficult to do when oil and gas prices are trading at their highest levels since 2014.
History tells me that the oil and gas market is heavily cyclical. Unfortunately, BP does not have a great record of creating value for shareholders over the cycle. Today, BP’s share price is lower than it was both five and 10 years ago.
Over the last 20 years, BP shares have underperformed the FTSE 100 by a whopping 80%, excluding dividends.
Of course, past performance is no guarantee of future results. But BP’s latest guidance suggests to me that the company expects to see lower oil and gas prices in 2022, as supply and demand return to balance.
I also think it’s significant that the company plans to limit annual dividend growth to just 4%. Any extra surplus cash will be used for share buybacks, which have the effect of boosting future earnings per share.
BP share price: my decision
My sums suggest BP’s profits are likely to peak this year, before falling slightly in 2023. Broker forecasts suggest a similar view. I think that BP’s share price could rise further in 2022, but I don’t expect to see big gains beyond that.
BP shares are expected to deliver a return of around 8% per year from now on, based on the sum of the stock’s 4% dividend yield and expected 4% annual dividend growth.
An 8% return is in line with the long-term average from the UK market. However, given the uncertainty about BP’s long-term prospects, I’d prefer to buy the shares at more of a discount. For this reason, I won’t be buying BP shares at the moment.
