Oil and gas giant BP’s (LSE: BP) share price is down 20% from its 10 February high, which astonishes me.
Some fund managers guided by environmental, social, and governance principles will not buy such stocks.
However, for other investors, I think the reasons that may have precluded buying the shares have largely vanished.
A more bullish oil price outlook
Oil prices are at their highest level since 26 April and the outlook is the most bullish in months.
Saudi Arabia announced on 4 June a 1 million barrels per day (bpd) cut in its oil production for July. This came on top of the 3.66 million bpd in collective cuts from the OPEC+ oil cartel implemented since October.
Cuts in oil production tend to push oil prices up over time and gas prices too. Historically, 70% of gas prices have been comprised of the price of oil.
What China crisis?
Another big factor weighing on BP shares has been China’s economic outlook.
This is unsurprising as for decades China sustained the commodities ‘super cycle’, characterised by rising commodities prices. This came from the vast disparity between its need for these commodities and its lack of indigenous resources.
China’s recent economic figures disappointed. However, this does not equate to a crisis, and nor will there be one any time soon, in my view.
The reason is that President Xi wants economic growth this year of 5% or more. And he wants this done carefully in a way that does not risk surging inflation later.
What many analysts fail to adequately factor into their calculations is that this is all they need to know. If Xi wants economic growth of over 5% then that is what China will record.
Ability to profit in all market conditions
Another key point that many investors have overlooked in BP is that it can make profits in all market conditions.
It is a major player in trading the global energy markets, with market intelligence second to none.
According to industry estimates, BP’s trading teams made around 14% of the group’s entire earnings in last year’s results.
This continued into Q1 2023 when the company announced underlying replacement cost profit for the quarter of $5bn. According to BP, this reflected an exceptional oil and gas trading result among other factors.
Commitment to shareholder rewards
For shareholders, this meant that during Q1, BP also completed $2.2bn of share buybacks from surplus cash flow. Additionally positive is that it is committed to using 60% of that cash flow for future buybacks this year.
In its 2022 results, it raised the Q4 dividend payout to 6.61p per share, taking the yearly total to 24.08p. The company stated in the results that “a resilient dividend remains [our] first priority within a disciplined financial frame”.
One risk for BP is if it is pressured into expediting its transition to cleaner energy, it seems to me. There are also risks to its infrastructure in some of the more volatile regions in which it operates.
However, I already hold positions in BP. If I did not, then I would buy the shares now expecting them to recoup all this year’s losses at least. I would also buy them for their generous shareholder rewards.
