BP (LSE: BP) shares have delivered very strong returns in 2022. Year to date, they’re up about 46% (one of the best performances within the FTSE 100 index).
Currently, I don’t currently own any shares in the oil giant. Should I buy some for 2023 and beyond? Let’s discuss.
BP is flying right now
From an investment perspective, there’s a lot to like about BP right now.
For starters, with oil prices where they are now, the company is literally minting money. BP’s break-even oil price is somewhere around the $40 per barrel mark. So, with oil prices in the $80s, cash is rolling in.
This is illustrated by the group’s Q3 results. For the quarter, it posted:
- An underlying replacement cost profit of $8.2bn, up from $3.3bn in Q3 2021
- Operating cash flow of $8.3bn, up from $6bn a year earlier
- Surplus cash flow of $3.5bn, up from $933m a year earlier
Cash cow
On the back of this booming cash flow, the company is returning a ton of capital to shareholders.
For example, last quarter, BP declared a dividend of 6.006 US cents per share, up from 5.46 cents a year earlier (the yield is about 4% right now).
It also announced a further $2.5bn share buyback. This will take total buybacks from 2022 surplus cash flow to $8.5bn. Buybacks tend to boost earnings per share.
At the same time, the oil major was able to pay down debt. It ended Q3 with net debt of $22bn versus $32bn a year earlier.
Dirt cheap
The valuation remains very low despite this momentum, however.
For 2022, analysts expect BP to generate earnings per share of $1.49. This puts the stock on a forward-looking P/E ratio of just four.
At that valuation, I see room for multiple expansion (i.e. share price appreciation).
It’s worth noting here that oil stocks are still generally unloved and underowned, as many investors left the sector during Covid when oil prices crashed. So, there is plenty of room for buyers to come in.
Fossil fuel uncertainty
One issue for me, though — as a long-term investor — is the growth potential in the long run.
Right now, BP is doing well because there’s a major supply/demand imbalance in the global energy markets (oil exploration and production slumped during the pandemic creating a shortfall). This has pushed oil prices up.
Yet in the long term, the outlook for oil, and oil companies, is less clear. Will oil prices hold up as the world moves away from fossil fuel energy? We don’t know. Oil prices are notoriously hard to forecast. The low valuation here suggests to me that plenty of investors are sceptical in relation to the long-term prospects.
It’s worth pointing out that BP has plans to become a clean energy company. Its goal is to have renewable energy capacity of 50 gigawatts by 2030. However, there’s no guarantee that it will be able to execute on these ambitious transformation plans.
My move now
Given this long-term uncertainty, I’m going to pass on BP shares for now.
I do think the stock has the potential to deliver solid returns in the short term.
However, my goal is to find companies that can deliver attractive returns for years to come.
