BP shares are on a knife edge!

A couple of months ago, I took the plunge and bought BP (LSE: BP.) shares. Since then, I’ve enjoyed a solid 12% gain.

Others will be even happier, with the FTSE 100 stock rallying almost 25% in the past three months. But zoom out and the picture is less straightforward. The BP share price is naturally volatile. Like all oil producers, it’s at the mercy of a force it can’t control – energy prices.

The stock’s down 2% over the past year and 16% over two. As pressure builds across almost every front, it’s now on a knife edge. I buy shares with the intention of holding for years, and decades, ideally. But how bumpy is this ride going to be?

Short answer? Very.

I can see five risks that could drive BP in any direction from here.

1. Falling oil prices

Donald Trump’s pushing for a peace deal in Ukraine while ramping up domestic energy production. Both could boost supply and drive oil and gas prices down. As green tech gets scaled up, renewable prices could fall sharply, adding to the squeeze.

2. The green transition

BP’s flip-flopped on its green energy commitments, frustrating both sides of the debate. The company initially pledged to cut oil and gas output by 40% by 2030 but later scaled that back to 25%. Now there’s talk of going full-on for fossils again. The board’s blowing about in the wind.

3. UK energy policy

Windfall taxes on UK production are a punitive 78%. Energy Ed Miliband wants to shutter all UK fossil fuel fields. There’s even talk of BP quitting London for a New York listing. It only adds to the uncertainty.

4. Break-up threats

Investors welcomed news that aggressive hedge fund Elliott is building a stake in BP. But this could go either way. If activist pressure mounts, BP could face a period of uncertainty and strategic upheaval.

5. The balance sheet

BP’s committed to another $1.75bn of share buybacks in Q1, on top of the $7.1bn repurchased last year. With full-year attributable profit plunging from $15.2bn in 2023 to just $381m last year, it’s effectively borrowing money to fund them. Net debt’s crept up a couple of billion to almost $23bn in the last year.

Despite these concerns, BP remains a cash machine, generating more than $27bn in operating cash flow in 2024. While down from $32bn in 2023, this still provides a strong financial base. The dividend remains attractive, with a recent 10% increase to eight cents per share. The trailing yield’s a handsome 5.23%. 

The board continues to streamline operations, with $800m in structural cost reductions achieved last year as part of a broader $2bn savings plan.

After the recent Elliott-fuelled jump, the shares may struggle while all this plays out.The 27 analysts offering one-year share price forecasts for BP have produced a median target of just over 493p. If correct, that’s a modest increase of just 5% from today.

I won’t sell my shares but I’m under no illusions. I’m taking risks here. BP’s on a knife edge. It could go either way.

This post was originally published on Motley Fool