This year has been a mixed one for the BP (LSE: BP) share price. The stock has returned 26%, excluding dividends over the past 12 months.
However, despite this performance, it is still trading around 20% below its pre-pandemic level.
This seems odd because the price of oil has recovered all of its pandemic loss in 2021. Therefore, it does not seem unreasonable to suggest that the BP share price should reflect this performance.
The company’s profits support this conclusion. For 2019, BP’s net income totalled $4bn. It earned that in the first quarter of 2021 alone.
Considering this backdrop, I think there are three potential scenarios that could dictate the direction of the company’s stock in 2022.
The outlook for the BP share price
In my opinion, there is one big reason why investors are not buying shares in the oil giant today, which is uncertainty. Uncertainty about the global economic recovery and uncertainty about BP’s place in the global energy transition.
Many analysts believe that the world will begin to return to some sort of normality next year after two years of pandemic disruption. This should meet some investor concerns about the outlook for the global economy.
At the same time, BP is investing heavily in its renewable energy business. With every month that passes, the company’s green energy division grows.
Revenue from this part of the business will make a substantial contribution to the top and bottom line by 2030. This implies investors will have to wait several more years to see how the company moves through the energy transition. But it is moving in the right direction. That is what really counts.
Put simply, I think some of the uncertainty surrounding the BP share price should dissipate in 2022. Investors could begin to return to the company as a result, especially if profits continue to flow.
No guarantee
Unfortunately, there is no guarantee that confidence will return in 2022 or that profits will continue to flow. Uncertainty may continue to prevail next year, and in this situation, I think the stock would continue to underperform the market.
BP may also attract more unwanted attention due to its oil and gas industry exposure. This could lead to costly court battles and even potential fines.
Still, even after taking these challenges into account, I think the stock is an attractive investment for next year.
Even if the company continues to fly under the rest of the market’s radar, the shares offer a dividend yield of 4.5% at the time of writing. Management has promised to return more cash to investors through share buybacks if profits continue to outperform expectations. By returning a healthy chunk of cash to shareholders, the corporation could add some support to the share price and attract income investors.
As such, I would be happy to buy the stock for my portfolio ahead of a potential re-rating in 2022.
Rupert Hargreaves 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.
