The BP (LSE: BP) share price has risen by 30% over the last 12 months. When oil and gas prices surged in the autumn, CEO Bernard Looney said the company was “literally a cash machine” in such a strong market.
While oil prices stay close to $100 per barrel, I expect BP’s cash machine to keep delivering. Profits are expected to top $16bn this year, more than 25% above last year’s $12.8bn. With the stock trading on just six times forecast earnings, should I buy the stock for my portfolio?
Why I might buy BP
I can see several reasons to be cheerful about the outlook for the BP share price. Futures prices for Brent Crude oil suggest the North Sea benchmark could stay above $100 per barrel for the rest of the year, and might not drop below $80 until 2026. Gas prices are also expected to stay high until at least next year.
At these levels, Looney’s plan to spend at least $4bn a year on share buybacks looks easily affordable to me. The group’s targeted dividend growth of 4% a year should also be safe. The forecast payout for 2022 gives BP shares a useful starting yield of 4.3%.
A sustained period of strong cash flow will also allow BP to repay debt while ramping up investment in low-carbon energy. The next few years could give Looney the opportunity he needs to position BP for a more sustainable future.
What could possibly go wrong?
Of course, energy prices change all the time and can move sharply in reaction to geopolitical events. Right now, the market seems to be pricing in long-term cuts to oil and gas supplied by Russia. However, the situation may change, and supplies from other countries may increase quicker than expected.
Another risk is that households and businesses all over the world are now feeling the pinch from high energy prices. A recession in Europe and the UK — and perhaps elsewhere — seems possible to me. This might reduce demand for energy, easing the pressure on supplies.
BP share price: my verdict
In the short term, I think BP shares could continue to rise. The stock’s 4.3% dividend yield looks safe to me and I don’t think the business is expensive, based on current oil and gas prices.
However, as a long-term investor, I’m not just looking for a quick share price pop. If I buy BP, I’ll be targeting long-term growth over five-to-10 years. I’ve not sure how likely this is.
The reality is that BP shares have been a pretty terrible long-term investment. BP’s share price is 30% lower than 20 years ago, and 10% lower than 10 years ago. By comparison, the FTSE 100 has risen by 40% over the last 10 years.
Looking ahead, I can see challenges from volatile oil and gas prices and the need to invest in low-carbon energy. I’m not yet convinced that BP will be a better investment in the future than it has been in the past.
If I bought BP shares, I’d prefer to buy them when oil stocks were out of favour, not during a boom period. For now, I won’t be investing.