BP (LSE:BP) shares are up 21% over the past three months. These gains have come despite a number of negative pressures, including a massive writedown on its Russian assets following the country’s invasion of Ukraine.
The reason for these gains is the surging oil price. Today is the ninth straight day in which the Brent Crude spot price has gone up. So should I buy BP shares? Or am I too late?
Recent performance
While underlying profits have surged, BP was forced to take a massive $24bn writedown on its decision to leave the Russian market in Q1. The company withdrew from its 19.75% stake in Russian oil major Rosneft and two other joint ventures.
However, replacement cost profit (BP’s measure of net earnings) rose to $6.25bn from $2.63bn a year ago. The figure far was far in excess of analysts’ expectations of $4.5bn as oil and gas prices soared. It was the company’s best performance in a decade.
Profits are expected to remain high during Q2, with oil prices surging further and refining margins elevated. BP held its dividend and committed to buying back $2.5bn of shares in the second quarter as the extra cash flowed in.
Prospects
But some investors will be concerned about the introduction of a windfall tax on energy companies in the UK. The tax will see a new 25% levy on UK oil and gas profits, in addition to the 40% rate already paid.
BP responded to the introduction of the tax, saying: “It is a multi-year proposal. Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans”.
At this moment, it’s quite difficult to see how this tax will impact BP’s operations. Some analysts have suggested it will be a big hit, others have noted that BP can frontload their investment plans to offset the windfall tax.
However, BP’s capacity to deliver its current level of underlying profits is dependent on high oil and gas prices. And that’s pretty difficult to predict.
At this moment, it doesn’t look like OPEC has a huge amount of spare capacity and China is relaxing Covid-19 restrictions so, for the short term at least, oil prices are likely to remain high.
But there are plenty of forecasts to suggest slowing economic growth around the world. A fall in economic activity could be enough to shift from a situation of undersupply to oversupply.
Should I buy BP stock?
Will I buy this stock? I’m not buying, primarily because I think negative economic forecasts will drag the oil price down, and thus reduce BP’s profits, in the next year or two. It’s certainly doing well right now, but I’m not sure how long it will continue.