BP (BP 0.38%) has been on a tear lately, and long-term investors will be the first to tell you that this type of price action is not typical for the oil major. The stock is currently trading just north of $29, up over 85% off the pandemic lows, which begs the question -- can the stock keep going?
The OPEC+ Impact
OPEC+'s willingness to maintain production cuts that the organization had made to combat the fall in demand brought about by the pandemic has been a boon for BP. . The results of the cuts speak from themselves. WTI and Brent crude are both up more than 100% compared to this time last year and are well on their way to all-time highs. This is ahead of winter which could further strengthen demand. As seen below, the demand is even pushing up natural gas prices and has greatly expanded refining marker margin in the key markets.
Source: BP.
OPEC+ has resisted the temptation to ramp up production in response to a strong recovery in demand. Vaccination efforts seem to have driven the restoration of oil consumption, and despite hiccups brought about by the delta variant, the trend has been clear.
Prices look set to remain at relatively elevated levels for years, but investors should monitor the developments from the OPEC+ meetings closely. Before lower-cost producers were bent on ramping up production as they could remain profitable at much lower prices than the developed countries. BP claims that it breaks even at roughly $40 per barrel which is on the high side of producers. In any case, it is unlikely that we see oil prices anywhere close to that level as long as OPEC+ remains unified.
In the past, price discrepancies drove what was, in effect, a market share/price war across producer nations, and it took a pandemic to unite them. In all fairness, the group has been united with respect to resisting production ramps, but investors have to wonder how long that will last. Nevertheless, the company is in a strong sequence right now, and the leadership team has committed to returning 60% of free cash flow back to shareholders in the form of dividends and buybacks.
Source: Getty Images.
The Renewables Transition
BP is focused on maintaining its strong financial performance while transitioning the company to a leading renewable energy provider. The two-pronged approach has allowed BP the luxury of being selective about what investments it takes on in the renewable space. The aim here seems to be long-term oriented and high-quality decisions that are supported by BP's strong execution in the oil market in the short to medium term. Investors shouldn't expect an overnight transformation, but rather a clear vision with strategic divestments and investments along the way.
The company has recently hit some major milestones with the renewable energy production pipeline hitting a projected 21GW/day, which includes offshore wind which is already at an impressive 3.7GW/day production level. The continued investments also saw BP hit 10,000 EV charging points, which is a major milestone. The renewable energy pivot is a part of a broader effort to be carbon neutral by 2050. The general feeling around the investments in renewable energy is that the moves will reap long-term benefits as the reliance on fossil fuels wanes globally. Oil will still be the major energy source of the foreseeable future, but the company is doing a great job balancing both segments.
The Takeaway
BP is a great pick for long-term-oriented energy investors. It is in the midst of a transition right now, but its core business is far from broken and it currently pays a juicy 4.4% dividend and is doing a stellar job with buybacks. The stock is still cheap with a price-to-sales ratio of 0.7 and a price-to-earnings ratio of 11.58. The company also recently completed its 5th consecutive quarter of debt reductions. The renewable investments are giving BP shareholders something they never had before; diversity. BP is in a great place right now and a harsh winter could push oil prices even higher. Investors can feel safe parking their money in BP for the long haul.
