I almost feel embarrassed to admit it, but I don’t hold BP (LSE: BP) shares. I don’t hold Shell either. As a result, I’m missing out on a key sector of the FTSE 100.
I did buy BP in the months after the Deepwater Horizon disaster in 2010, before the full scale of the human and economic tragedy had sunk in. I sold at a loss and was glad to get out.
For a while after that, I didn’t want to go anywhere near the oil sector. As well as the Deepwater aftermath, there was all that fuss over peak oil. Apparently, the planet was going to run out of black gold, leaving big oil with nothing left to drill. The shale revolution and new drilling technology gave the lie to that.
I don’t hold this top stock
Next, we had the net zero drive, which forced big oil to make half-hearted noises about pursuing the energy transition. Again, BP seemed doomed. Then Vladimir Putin invaded Ukraine, and suddenly we remembered that the world runs on oil and gas.
As energy prices rocketed, BP shares followed. Which gave me yet another reason not to buy them. As a rule, I prefer to buy shares when they’re out of favour. That allows me to pick them up at a cheaper price, often with a higher yield, and potentially benefit when they recover.
So have I missed out by failing to buy BP? Well that depends. If I’d invested £10,000 in BP shares three years ago, I’d be sitting on a 48% gain. My money would be worth £14,800, with dividends lifting my total return closer to £16,000.
Yet if I’d bought 12 months ago, it would be a different story. The share price is down 15.45% in that time, which would have reduced my £10k to £8,455. Dividends would have lifted that to around £9,600. I’d still be sitting on a loss though.
Commodity stocks are cyclical. In my view, it’s better to buy them when they’re down rather than up. So will the outlook brighten for BP?
It’s still gushing out money
Q4 profits of $3bn beat estimates but still fell sharply on the previous year’s $4.8bn. Annual profits fell too but investors were pleased with a new quarterly $1.75bn share buyback. That was up from the previous buyback of $1.5bn.
In the short term, much depends on where oil goes next. It’s been hovering around $80 for some time, despite Red Sea missile attacks and Saudi Arabian and Russian production cuts aimed at shoring up the price. US production is filling the gap while energy demand has been hit by Europe’s mild winter.
BP shares look good value trading at a forward valuation of just 6.91 times earnings, while 2023’s 4.79% yield is forecast to hit 5% in 2024.
It still carries more than $20bn of net debt, and markets forecast that could hit $27.8bn in 2024. Given annual sales of more than $200bn, I’m not too worried.
If falling inflation and interest rates boost the global economy, that may drive up energy demand but nobody can say for sure. I think the BP share price dip makes now a good time to buy. Which I’ll finally do, as soon as I have the cash.
