My wife recently a cash windfall last month, which we invested into more shares. We bought eight FTSE 100 and two FTSE 250 stocks. However, convincing my wife to buy BP (LSE: BP) shares was hard work.
Buying BP
One easy way to offset higher fuel prices is to own shares in energy producers. Hence, as the oil price started rising from June, I worried that our family portfolio contained no energy stocks.
As an oil & gas supermajor, BP is one of our planet’s biggest polluters, so its shares are often shunned by environmental, social and corporate governance (ESG) investors. However, its huge cash flows should make it a major player in the transition to low-carbon energy, which is how I convinced my wife to buy.
Also, ESG concerns don’t seem to have hurt the share price. At 519.9p, it’s up 8.7% over one month and 14.9% over one year, easily beating the FTSE 100. However, the stock is down 8.3% over five years — but all these figures exclude BP’s hefty cash dividends.
Why we bought BP
1. Oil demand at record high
Global oil demand is expected to hit a new high this year. The latest forecast predicts the world will consume a record 101.8m barrels a day (a total of 37.2bn barrels) in 2023. Despite efforts to reduce reliance on fossil fuels, the rising global population and increasing affluence keep pushing up global energy demands.
2. Major producers cut back
To control and stabilise the oil price, the OPEC+ cartel agrees strict targets for its members. Yet two huge players, Saudi Arabia and Russia, have restricted supply by cutting their production and export targets. Last week, both nations extended these cuts for the rest of 2023. Of course, these supply restraints help to support higher oil prices.
3. Oil price soaring
As I write, the price of a barrel of Brent Crude stands at $94.91. That’s 35.4% above its 52-week low of $70.12, set on 20 March 2023 during a brief US banking crisis. Today, it’s less than $5 short of the 52-week high of $99.56, set on 7 November 2022.
Obviously, a higher price means higher revenues, profits and cash flows for big oil players, including BP. And that’s why I expect encouraging results from this business in the second half of 2023.
4. Shares look cheap
We bought BP stock for an all-in price (including stamp duty and buying commission) of 484.1p. They’ve since risen by 7.4%, which is a positive start. But even at today’s price levels, the shares trade on a lowly multiple of 6.3 times earnings, for an earnings yield of 15.8%. That’s a lot cheaper than the London market as a whole.
5. I like dividends
Finally, as a value investor, I love reinvesting my dividends. BP’s current cash yield is 4.2%, versus the Footsie’s 4%. I’d expect this yield to rise over time, despite BP cutting its payouts in 2011 (Deepwater Horizon oil spill) and 2020 (Covid-19).
Then again, dividends aren’t guaranteed, so BP could decide to slash or suspend these payouts without notice. Also, the oil price is notoriously volatile, which often causes oil stocks to move up and down erratically. But I’m willing to bear these market risks — for now, at least!
