Remember during the early days of the Covid-19 crisis when oil prices collapsed in April 2020? The price of a barrel of Brent Crude crashed below $16. This would have been unimaginable in 2019. But those days are long gone, thanks to the global economy’s comeback. On Tuesday, a barrel of Brent surged to a high of $88.13, before easing back to $86.97 as I write. At its 52-week low on , Brent Crude bottomed out at $54.48. Since then, it’s gained almost $32.50 a barrel. That’s a surge of 59.6% in under a year. As a result, oil prices are at seven-year highs, lifting global inflation. Hence, with the oil price at its highest level since October 2014, should I buy BP (LSE: BP) shares now?
BP shares have doubled since October 2020
On Tuesday, BP shares closed at 395.75p, up 2p (0.5%) on the day. Since 31 December, the BP share price has leapt by almost a fifth (+19.7%). What’s more, it’s soared by 42.1% over the past six months and 31.4% in a year. Also, it’s almost 150p higher than the 52-week low of 250.35p on 2 February 2021.
But what’s remarkable is how far BP shares have come since they crashed to generational lows in Autumn 2020. On 28 October 2020, with BP stock having collapsed to 195.74p, I wrote that BP stood for Bumper Profits. I also wrote: “It’s time for bold investors…to bite the bullet and buy big.” I’m delighted to have made this value call, because BP shares have more than doubled since then, surging by £2 (+102.2%) to date. Wow.
However, the big question is, would I buy BP at current price levels? On fundamentals, BP shares no longer look cheap to me. The global energy giant is now valued at £77.8bn, making it a FTSE 100 super-heavyweight once again. The stock trades on a price-to-earnings ratio of 16.7 and an earnings yield of 6%. The dividend yield is just short of 4% a year, in line with the wider Footsie. To me, these figures don’t exactly stick out as being in value territory.
But BP’s earnings are set to soar
Then again, the above fundamentals reflect BP’s recent past and not its future. With oil prices racing upwards, BP is poised to make money hand over first. And what if the oil price gushes to $100 on supply shortages, as several analysts forecast? Then BP would make out like a bandit, generating huge revenues, cash flows and earnings. In this scenario, the group may decide to reward long-suffering shareholders (remember Deepwater Horizon in 2011?) with big share buybacks and higher dividends. In this outcome, BP shares might well continue on their 2021-22 trajectory.
On the other hand, what happens if Covid-19 mutates into a dangerous new variant, triggering more social restrictions and lockdowns globally? This would spell bad news for energy prices and, most likely, for BP and its shares. But supply cutbacks by OPEC+ oil-producing nations might cushion the blow to oil prices. Alternatively, if the global economy really booms, maybe oil could return to its October 2014 high of $115. Who knows?
What I firmly believe is that BP’s profits in H1/2022 could be way ahead of those in the first half of 2021. Therefore, though I don’t own BP shares today, I’d buy at the current price just below £4.
Cliffdarcy 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.
