BP (LSE:BP) is Britain’s fifth largest company and derives the majority of its revenue from extracting and refining oil and gas. It’s therefore not surprising that the BP share price is closely linked to the wholesale price of these two fossil fuels.
A cash machine
We all know how energy prices have soared recently – we can see it in our electricity and gas bills, as well as at the petrol pump – and BP has benefitted accordingly. Replacement cost profit (BP’s preferred measure) in the second quarter of this year was $8.5bn, up from $2.7bn for the same period last year. Operating cash flow was $10.9bn supporting the assertion made in November 2021 by BP’s CEO, Bernard Looney, that the company is “literally a cash machine”.
Energy prices
But the Brent crude oil price has been falling recently and is currently trading at a seven-month low of around $90 a barrel. Forecasting oil prices is more of a lottery than a science but few are predicting a downturn soon. The US Energy Information Administration believes Brent crude will average $95 a barrel in 2023.
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The oil price is also “manipulated” by the oil-producing nations who will have no hesitation in cutting production if they see a drop in demand.
Returns to shareholders
BP is currently paying dividends each quarter and the dividend yield is presently a respectable (if unspectacular) 4.5%.
However, this is not guaranteed.
In 2020, following a second quarter loss of $6.7bn due to the Covid-19 pandemic and the collapse in the demand for energy, BP halved its dividend and it hasn’t recovered much since.
But it has recently commenced a $3.5bn share buyback programme, due to be completed by the middle of November, having committed to using 60% of its surplus cash to repurchase its own shares.
Downsides
But the energy business is a dangerous one that brings significant risks for shareholders.
In 2010, an explosion on Deepwater Horizon, an oil rig operated by BP, killed 11 workers and oil was still spilling into the Gulf of Mexico three months later. The disaster is believed to have cost BP in excess of $60bn. The share price crashed by over 50% and, even today, it’s 30% below its pre-disaster level.
Energy giants like BP are also unpopular.
There are repeated calls for windfall taxes to be imposed on their “excess” profits. Liz Truss has ruled this out, but these taxes are popular with voters.
Some argue that energy companies should be nationalised.
Clean energy
BP’s current strapline is “Performing While Transforming” as it seeks to re-position itself from carbon energy to green energy. It claims to be “reimagining energy” and is seeking to be a net-zero company by 2050.
But the world’s green energy transition will take decades, and the demand for oil is not expected to peak until at least 2028, some say 2040. Research by McKinsey forecasts peak gas demand to be in 2037.
Here’s what I am doing
So, am I going to add BP to my long-term portfolio?
Yes, because whether we like it or not, the demand for oil and gas is here to stay. Even at 445p, there appears to be scope for further share price growth and the dividend should help to reinforce this.
