The BP (LSE:BP) share price has had a disappointing 2023. The stock has fared worse than rival Shell as well as the wider FTSE 100.
I think there are a couple of reasons for thinking that 2024 might be a different story, though. As optimism grows about a potential cut in interest rates, I see an improved outlook for BP.
Oil prices
Let’s start with the issue of oil prices — something that’s always fundamental to BP’s profitability. In 2023, the average price of Brent crude oil has been $82.5 per barrel.
The US Energy Information Administration is currently forecasting an average of $83 per barrel in 2024. In other words, something similar to this year’s average.
That’s significant for two reasons. One is that the current price of Brent is below its average for this year, at just under $76, implying an upside of around 10% from today’s prices.
The other is that BP actually achieved decent profitability with oil prices at these levels. Right now, the stock trades at a price-to-earnings (P/E) ratio of four.
By any standards, that’s low and it’s a significant discount to Shell (at around 7). So if the profits keep coming and the company keeps buying back its shares, I can see the price moving higher in 2024.
Renewables
The other big reason the BP share price has underperformed is the company’s investments in renewables. Compared to Shell, which has focused on shareholder returns, BP has been focused on growth.
In general, this hasn’t worked out well. The firm’s attempts at building wind farms in the US have resulted in significant impairment charges as projects had to be scrapped due to rising costs.
Those costs have been the result of two things, though. One has been more expensive debt as interest rates have gone up and the other is higher materials costs due to inflation.
At the moment, there’s optimism that both could improve in 2024. Inflation has fallen significantly since the start of the year and investors are looking to the Bank of England to bring down interest rates as a result.
If this happens, then BP’s growth plans could look a lot more attractive than they do at the moment. Lower costs could make more projects viable and boost the company’s long-term profitability.
Should I buy BP shares for 2024?
There are some important risks that investors need to think about when it comes to the BP share price. The main issues are what happens if oil prices come in lower than expected or interest rate cuts don’t materialise.
There’s a lot that goes into forecasting oil prices, so it’s impossible to be certain exactly what 2024 prices might be. Likewise, the Bank of England cutting rates next year is far from guaranteed.
These are the risks that shareholders need to weigh against the potential rewards. On balance, though, I think there are good enough reasons for me to consider buying BP shares for 2024 and beyond.
