Over the past year, shares in BP (LSE: BP) have soared. In fact, the BP share price has grown 39% in 12 months.
Here I look at what lies behind that increase – and my plan of action for the shares.
A rising tide
As a leading oil and gas producer, the simple reason BP shares have moved up is higher energy prices. That benefits the industry as a whole. The BP share price has done well, but rival Shell has actually risen more during the past year. It is up 50%.
For energy producers, higher energy prices almost always translate into larger profits. But the nature of the industry is cyclical. That means that when profits are high, companies have lots of money to invest in new projects. That pushes up supply, which then leads to prices falling. When prices fall far enough, companies spend less on new projects. That creates less supply in future, pushing up prices again.
The rising oil price in 2022 is not simply down to a mismatch between global supply and demand, but also due to sudden changes in how that supply is distributed. That might continue to affect the prices for a long time. But equally, it could change fast again, as it already has this year.
BP and its competitors
That means there is a risk that oil prices will fall. If that happens, I expect the BP share price to move down again, perhaps sharply.
On the other hand, the oil price may stay elevated for years. So, even after a 39% rise in the past year, the shares might yet move up further.
So to some extent, when I am thinking about whether to buy BP shares, I am taking a view on where the oil price seems to be headed. If I was bullish on that, though, would BP be the best share for me to own?
BP has a dividend yield of 3.4% and it cut its payout a couple of years ago. Dividend Aristocrat Exxon Mobil has a similar yield, at 3.6%. But it has grown its annual dividend for 39 years on the trot. Dividends are never guaranteed, but Exxon’s management seemed to work harder to maintain the payout when oil prices crashed in 2020 than BP’s or Shell’s.
On top of that, like Shell, I feel BP is putting a lot of effort into developing renewable power sources at a time when there is still huge money to be made in oil. I think more focus on oil and gas in coming years could be a more profitable business move.
My move on the BP share price
Oil prices will fall at some stage, the question is just when.
So although I think the BP share price could move up in the short term, I also see risks. Even if I wanted to invest in oil companies right now, I would probably buy shares in one like Exxon, because in my opinion, it has a sounder business strategy than BP.
But because of the risks I see from oil prices falling at some point, I actually sold my Exxon shares this year. For now, I will wait until we go into a downward phase of the price cycle before buying more oil shares.