The BP (LSE: BP.) The share price is up around 2% this week as oil markets rise again. On Monday (May 18), Brent crude oil futures reached USD 111 per barrel and WTI – USD 105.
For a company that claims that each one-dollar move in oil prices can escalate pre-tax operating profit by $340 million, this kind of price action really matters.
So is this just a short-term boost or the start of something lasting for BP investors?
Factors supporting further growth
When oil remains high, BP’s earnings engine tends to falter. This was clearly demonstrated in recent quarters, where the company reported first-quarter underlying earnings of $3.2 billion.
This is more than twice as much as in the same period a year earlier, which was caused by the so-calledunique contribution” from oil trading and higher refining margins.
So, in addition to refining oil, it makes money from volatile energy markets,
There may be another benefit to UK policy – Rachel Reeves is reported to be planning to extend the current 5p per liter motor fuel duty rather than escalate it.
This won’t change BP’s fortunes overnight, but keeping pump prices low tends to support demand on the margin.
If oil remains costly and governments avoid charging drivers extra tax, could BP’s cash flow stay stronger for longer?
The yield (and value) is attractive
In some respects, BP still looks surprisingly economical. Using a discounted cash flow (DCF) model, the stock is estimated to be trading at approximately 57% below fair value. This is based on future earnings forecasts of 10.39% per year.
That won’t necessarily happen, but it supports the view of other analysts who believe BP is deeply undervalued in terms of long-term cash generation.
As one analyst put it, BP “seems understated given the history of strategic improvements imposed on high oil prices“
For most investors, however, well-covered dividends add real appeal.
- Dividend rate: 4.5%
- Dividend per share: 25p
- Cash coverage: 6.8 times
Moreover, it has already increased this year’s Q1 dividend by 4%, which is supported by a significant share buyouts in recent periods.
But that doesn’t mean it’s a guaranteed ATM.
A demanding road lies ahead of us
High oil prices won’t solve all of BP’s problems. Negotiations with unions have resumed at a BP refinery in Indiana, but the two sides are still far from reaching an agreement on job safety, pay and other conditions.
It is also reshaping its portfolio by selling gas assets abroad and potentially eliminating part of its pipeline gas trading team. This may escalate focus on projects with a higher rate of return, but it also increases implementation risk.
The main problem is the high sensitivity to oil prices and political shocks. If oil plummeted or regulations were tightened, would today’s “cheap” quotation do you still look so attractive?
My verdict
It’s clear that BP still has a lot to offer investors who want exposure to time-honored energy and can navigate a bumpy environment. High oil prices, good trading results and a guaranteed dividend of 4.5% add to the attractiveness.
But it still faces geopolitical upheaval, labor disputes and the risk of foreclosure.
In my opinion, the earnings history alone is worth considering, and that’s why I’ll hold on to the stock even as oil prices swing wildly.
Mark Hartley owns BP shares.
