BP (LSE:BP) shares moved slightly higher on Monday ahead of Tuesday’s earnings update. The hydrocarbons giant has seen its share price go from strength to strength this year, despite a costly withdrawal from its Russian operations.
So let’s take a closer look at the earnings update and see whether BP might be right for my portfolio.
BP earnings
BP will unveil record quarterly profits on Tuesday, following in the footsteps of peers last week. Analysts are predicting three-month earnings of $6.8bn, a massive increase on the $2.8bn this time last year. The first quarter of the year saw $6.2bn in earnings.
BP’s underlying replacement cost profit – its headline measure – is expected to come in at $6.6bn for the quarter.
The company’s major profit turnaround has been powered by soaring oil and gas prices following Russia’s invasion of Ukraine and surging demand in the wake of the post-Covid recovery.
However, earnings estimates have been proven wrong this quarter. Several firms have impressively outperformed estimates.
Profitability
BP’s profitability is largely dependent on the price it can get for its crude oil and the margins it makes on fuel sold at the pump. With benchmark crude prices around $100 a barrel, BP is clearly benefitted.
During the pandemic, the UK-based oil giant said it wanted to reduce its break-even point to $35 by 2021. Even if that was not achieved, I think BP’s margins are fairly sizeable right now. But in this high oil price environment, I expect they’re bringing more costly barrels online.
The question is, where will oil go next? Well, analysts at Citi suggest that the oil price could fall as low as $65 towards the end of this year, and even as low as $45 in 2023 if the global economy slows.
Meanwhile, JP Morgan analysts have suggested benchmark prices could hit a $380 a barrel if Russia were to take aim at Western nations and cut oil sales.
It’s also worth noting that BP’s downstream operations will be doing very well right now. Prices at the pumps are still high and profits will complement those in the upstream segment.
Would I buy BP shares?
In general, I think we’re entering a period of scarcity that will be characterised by higher commodity prices amid increased competition for resources. So, in the long run, I see the oil price rising.
However, there are plenty of negative economic forecasts for this year and the next. And I think we may see this weigh further on the oil price in the months to come.
There’s also the matter of the windfall tax, and because of loopholes relating to investment, I’m unsure exactly how that will impact BP.
It’s also important to remember that BP is a business in transition away from hydrocarbons towards greener energy. Transitions are risky periods, but it finally appears that the renewables sector is truly profitable, particularly in the current environment.
However, because of the reasons noted above, I wouldn’t buy BP shares now. That’s because I think there will be better entry points later in the year.