It has been a good year for shareholders in energy giant BP (LSE: BP). Rising oil prices have helped push the BP share price up 35% over the past 12 months.
Is that sustainable or might the shares fall back again? Figuring out the likely answer to that question could help me decide whether BP might be a good fit for my portfolio.
Why has the BP share price risen?
The obvious reason behind the rise in the BP share price is what has been going on in the energy markets. While oil and gas prices surging is bad news for most consumers, it is good news for profits at energy giants such as BP. Indeed, in its most recent quarter, BP reported a profit of $9.3bn.
That is roughly triple the $3.1bn it reported in the same quarter last year. In a capital-intensive industry like energy, profits can jump around a fair bit from quarter to quarter even in the ordinary course of business. But that is still a sizeable improvement in BP’s profitability.
Can that continue?
The answer largely depends on the energy price in my opinion. For now there are a lot of factors that could keep oil and gas prices high, from seasonal demand peaks in the northern hemisphere to supply constraints. But at some point, as is the way with a cyclical market like energy, I expect prices to ease off. If they fall far enough, I reckon the BP share price will follow.
Is now the time to buy?
Still, energy remains pretty lucrative for now. So, should I add some energy shares like BP to my portfolio?
I do not plan to, precisely because of the cyclical nature of the business. When energy prices are high, producers can effectively pump money out of the ground in large quantities.
But when that happens, often companies invest in new production capacity to take advantage of the high prices. As that comes online, supply starts to outstrip demand, pushing prices down. If that happens, profits at oil majors often falls. That could be bad for the BP share price.
So I do not think this is the point in the pricing cycle at which to consider adding BP shares to my portfolio. I think its high profits at the moment are primarily a reflection of where we are in the energy pricing cycle. At some point I expect prices to fall as part of that cycle.
Is BP the right oil major for me?
Even when that happens, I am not sure that BP will be a company I choose to invest in to get exposure to oil and gas.
Before selling this year, I held a position in Exxon. Unlike both Shell and BP, it did not cut its dividend during the pandemic. In fact it continued to raise it annually as it has done for over three decades, earning it the distinction of being a dividend aristocrat.
BP’s cut now looks premature to me given how buoyant the business performance has been recently. That has put me off the company’s management. So when the oil cycle dips again, if I do buy shares to try and benefit from that, BP would not be among them.