It’s been a great start to the year for the BP (LSE: BP) share price. It’s surged 26% as I write today. It’s up an even bigger 62% over one year, so things must be looking good for the company. In fact, it’s now the seventh largest member of the large-cap FTSE 100 index.
I’m going to see if I’ve missed the boat on this one, or whether I should still buy the shares today.
A big set of results
BP released its final results for full-year 2021 last week. And they were bumper. The company swung from heavy losses in 2020 to a profit of $7.6bn in 2021. Operating cash flow almost doubled too. This gives the company ample room to invest in capital projects, and pay shareholders a dividend.
On this point, the CEO said: “We’re delivering distributions to shareholders with $4.15bn of buybacks announced and the dividend increased.” This is a good sign, and should mean earnings per share growth and increased income for my portfolio.
It’s easy to see why the results were impressive for 2021. The pandemic heavily disrupted the oil and gas industry so production volumes declined. But demand for the fuels has bounced back strongly, and quicker than the rebound in oil and gas production. This imbalance has meant the prices of these commodities have skyrocketed, which has boosted the profits of companies like BP.
Risks to consider
The main issue I see with BP shares is the inherent cyclicality of the business. Profits are great when commodity prices rise, but crash just as quickly when oil and gas prices fall. It makes it difficult for me to invest as a long-term investor.
The oil and gas sector is also in structural decline, in my view. Fossil fuels are very unsustainable, and there’s a big global effort to transition to renewable energy sources. BP has to pivot its business significantly if it’s to survive in the long run.
Should I buy at this share price?
However, in the short term, there’s no denying that the world still heavily depends on oil as an energy source. Therefore, I don’t see BP’s profits drying up any time soon. There’s also still too little production to satisfy demand for oil today. Indeed, some analysts are forecasting that the price of a barrel of oil will reach $100. If this happens, then I can see the BP share price rallying further.
But I’m assessing the investment as a long-term decision. BP has a long way to go in its transition to a low-carbon business. This will come with significant risk as it shifts away from oil and gas, to renewable energy sources.
So for now, I won’t be buying BP shares, even though the share price could rise over the short term, along with the oil price.
Dan Appleby 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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