With energy prices riding high, it has been a good time to be a shareholder in energy major BP (LSE: BP). The BP share price has grown 43% over the past year. Lately it has been hovering around the £4 mark. In assessing the share as a candidate for my portfolio, I want to consider whether the momentum can continue. Can BP hit £5 this year?
A rising tide
The reason for the increase in the BP share price over the past year is not difficult to fathom. While it is up 43%, rival Shell is up by 41%, Chevron 44% and ExxonMobil 50%. As the saying goes, a rising tide lifts all boats. That is not always true in the stock market, but the increase in oil prices over the past year has clearly been a key factor in the share price performance of energy companies, including BP.
What is less apparent is whether BP has done anything that justifies the share price rise more than rivals. Like Shell, it slashed its dividend in 2020. BP has also been vocal about its plans to increase its focus on energy sources other than fossil fuels. I am sceptical about what that means for the company’s profit margins in the medium term. But the share price movement in the past year suggests that many investors feel that it is a promising strategy. That sentiment could help support the BP share price, by attracting ESG investment funds.
Income and growth prospects
I was not impressed by BP’s large dividend cut in 2020, which I felt suggested management out of touch with its shareholders and its own business model. Energy is a cyclical market and suddenly slashing the dividend when prices are low implies a lack of long-term planning, in my opinion, despite the unprecedented Covid crisis. Nonetheless, the shares currently yield 4% even after their price increase over the past year. So from a dividend perspective, I find BP attractive for my portfolio at the moment.
Turning to growth, I also feel quite upbeat about the prospects for the company. One benefit of the dividend cut is that it gave BP more flexibility to strengthen its balance sheet over time. Energy prices have soared – but I think they could still go higher. That could boost revenues and profits at the company in coming years. Slashed capital expenditure in the sector during the pandemic has led to a possible drop in future supply, but demand remains high. I see that as good for BP as oil and gas remain key to its business results.
The share price at £5?
Just as I think a lot of the explanation for the increase in the BP share price over the past year lies not in the company’s strategy but simply in energy prices generally, I think oil prices will continue to be important for the share price. If they remain high or go higher than they are now, I think that could propel BP shares to £5 this year.
Reaching £5 is around a 25% increase from the current share price, a smaller rise than over the past year. It is not an unprecedented valuation, either. It would actually put the share price back to where it was in 2019. So, from both a growth and income perspective, I would consider buying BP for my portfolio.
Christopher Ruane owns shares of ExxonMobil. 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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