The BP (LSE: BP) share price has performed strongly recently, reaching 365p at the end of October. Over the past year, the shares have also risen 34%. This has mainly been due to rising oil prices, which have helped to boost profits. Nonetheless, it has fallen back over the past couple of weeks, and is currently priced at 326p, a 11% decrease from its recent highs. As such, has the BP share price already reached its peak, and this is the start of a major decline or is this a buying opportunity on the dip?
Recent trading update
On the face of it, the recent Q3 trading update looked pretty strong. Indeed, underlying profits were $3.3bn, a slight rise from the $2.8bn recorded the previous quarter. Last year, underlying profits were also only $86m, showing the company’s strong improvement.
This strong improvement has also been met with strong shareholder returns, including a further $1.25bn share buyback announced. A quarterly dividend per share of 5.46 cents is also 4% higher than last year and equates to a yield of around 5%. This is very strong in comparison to many other FTSE 100 stocks.
Strong cash generation has equally enabled the company to reduce net debt, which now stands at under $32bn, 20% lower than last year.
As such, these Q3 results highlight that the company is performing well and many of the problems caused by the pandemic are over. This may suggest that the BP share price has more room to rise and may not have reached its peak.
Other factors
Despite these strong results, there are some reasons for pessimism, and these may have caused the recent fallback. In fact, the excellent cash generation was only possible due to the soaring prices of oil. Unfortunately for BP, I don’t think that these high prices are here to stay too long.
This view is also shared by the US Energy Information Administration, which stated on Thursday that it believes that crude oil prices are set to decline due to supply being greater than demand. It has placed an average cost of $72 per barrel next year, far lower than its current price of $80. If this turns out to be correct, BP profits could be hit, both damaging the share price and shareholder returns.
I’m also pessimistic on the long-term future of oil prices, especially in the ever-increasing climate change conscious society. As things like electric vehicles start to increase in popularity, I feel that oil demand is likely to waver. This will have negative impacts on oil prices over the longer term.
As such, it will be vital for BP’s growing renewable energy division to help replace these profits. But while BP is doing better than other oil companies, I still feel like the company’s investment into renewable energy is not enough. Instead, BP seems to have prioritised large shareholder returns. For the long-term health of the company, I don’t believe this is wise.
Where’s next for the BP share price?
I think the BP share price may have reached its peak, and therefore, I’m not going to buy any shares. This is because oil prices look set to decline over the next few years, and I still believe the company’s renewable energy division is unequipped to replace these lost profits.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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