The BP (LSE: BP) share price has flown since the Covid pandemic in a blow to those who thought fossil fuel stocks were finished.
The end of lockdown was always going to fire up the oil and gas sector, as the world started moving again. Yet BP has benefited from other headwinds too.
The push towards net zero was supposed to destroy the investment case for big, dirty polluters like BP, but the practical difficulties of shifting to a low carbon economy have tampered expectations. The world isn’t ready to run on renewables quite yet.
Last week, BP shares got another boost, from the horrific events in the Middle East. The oil price had been falling before Hamas attacked Israel. Now it’s rising on fears that it could trigger a wider regional conflict, imperilling oil supplies.
Unsurprisingly, this turned the shock departure of former CEO Bernard Looney into a sideshow.
Last week, the BP share price jumped by 9.75%. It’s up 19.52% over 12 months and 156.96% over three years. So can we expect more of this?
Nobody in their right mind would predict what happens in the Middle East next. Another unknown is how Saudi Arabia would respond if oil shoots past $100 a barrel.
Would it reverse production cuts, for fear that higher prices would accelerate the shift to green energy?
I don’t know. No investor does. I buy shares with a minimum five-year view, which means I have to look beyond short-term price movements. But I do think the oil price resurgence shows we haven’t hit peak oil demand yet. For from it.
The FTSE 100 is packed full of stocks offering yields of 6%, 7%, 8% to 9%. BP is no longer one of them. It rebased in 2020, slashing its dividend per share from 41 US cents to 26 cents, then to 22 cents in 2021. Today, it yields just 3.6%.
At least investors can look forward to a bit of progression, with the board hiking the Q2 dividend by 10%. Markets expect the yield to climb to 4.21% in 2023, and 4.52% in 2024. Well that’s a bit more like it.
There are other dividend stocks
BP also announced a further $1.5bn share buy back. Management has completed more than $10bn of buybacks from surplus cash flow over the last four quarters, cutting its issued share capital by more than 9%.
It hasn’t abandoned low carbon energy, having recently enter the offshore wind market in continental Europe, winning the rights to develop two projects in Germany with a total potential generating capacity of 4GW. It’s also got a growing pipeline of hydrogen projects.
So would I buy BP today? The shares look cheap, trading at a forward P/E of 6.74 times earnings for 2023. It does have net debt of $23.7bn, which I’d like to see shrink. But given its profitability, it doesn’t really worry me. Windfall taxes remain a risk, though.
We still live in the oil age and that makes BP shares impossible to ignore. Yet I can’t buy every stock I like. There’s a danger its shares could peak after the recent surge.
Also, I can get more generous dividends elsewhere. I think I’ll leave it on my watchlist for now.
