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PA (LSE: BP) Stocks have been a surprising investment of late, rising 13.5% year to date and an impressive 50.18% in the last 12 months. That compares to increases of 4.25% and 9.27% respectively for the FTSE 100 like an everything.
This will surprise few people. The energy shock caused by Russia’s invasion of Ukraine has been felt in everyone’s pockets.
This is a high energy shock.
However, the price of oil has slumped since hitting a high of $121 a barrel in early June, with the Brent and West Texas Intermediate crude oil benchmarks now trading at just $81.63 and $74.65. That’s a drop of about a third. With wholesale natural gas prices also falling sharply, BP’s popularity is not just due to rising energy prices.
One explanation is that investors are no longer afraid that BP will fall short on the energy transition. If the past year has taught us anything, it’s that we still need fossil fuels. Our social and economic stability is based on your availability.
If BP and other FTSE 100 oil majors Shell If you withdraw from fossils too quickly, dirtier producers in countries with weaker regulations will rush to fill the void, and the planet will be the net loser.
BP’s recent results have certainly impressed investors. More than doubled annual earnings to a record $27.6 billion, and is regaling shareholders with a $2.75 billion share buyback, funded by fourth-quarter excess cash flows of $5.1 billion.
The longstanding concern about buying BP shares is that the company is at the mercy of the oil price, over which it has no control. I remember how its shares collapsed below 200 pence during the pandemic lockdowns, when oil briefly touched $20 a barrel. Today it is at 549p.
However, the price of oil would have to fall by half to cause problems for BP, as its breakeven point is now £40 a barrel, thanks to frenzied cost-cutting during the last recession. With the oil price expected to hover between $90 and $100 a barrel this year, the good times should continue into 2023. Especially as the Chinese economy reopens after the Covid lockdowns.
Still a FTSE 100 income hero
BP’s performance is disappointing compared to the days when 5% or 6% was routine. Today it is yielding 3.7%, but it is on its way back, with management increasing its ordinary dividend by 10%. Next year, BP’s return is forecast to hit 4.6%, covered by a meaty 4.1 for earnings. It’s rare to see major FTSE 100 stocks with so much coverage (although barclays has been running it nearby).
BP’s net debt has now been cut for the 11th consecutive quarter to $21.4bn, removing another long-standing investor concern. The threat of UK windfall taxes also seems overblown. The North Sea accounts for less than 10% of BP’s global profits. The UK energy profit tax will cost the group £700m, but that’s a fraction of its global tax bill of $15bn.
I just have one big concern today. I can’t afford to buy all the FTSE 100 shares I like, and one filter I apply is to buy them when their shares go down rather than up. On that basis alone, I will not buy high-flying BP in March. BT group and Unilever both offer superior recovery chances, in my opinion, and I’ll give those two stragglers priority instead.
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