The BP (LSE: BP) share price is down around 17% from its February high – a bargain-basement level, I feel.
I see part of this decline coming from the bad press associated with oil and gas companies that affects the smaller investor. Another part comes from the environmental, social, and corporate governance rules that prevent some institutional investors from holding such stocks.
The key to picking stocks, though, is identifying when one is about to turn. And for me, BP is at that point.
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China’s growth may positively surprise
China was the key driver of the 2000/14 commodities ‘supercycle’, characterised by rising commodity prices, including for oil and gas.
But economic activity in China slumped in the past two years due to Covid. And recent economic figures from China have disappointed, pushing oil prices down again.
Officially, China announced an economic growth target of 5% for this year. Unofficially, its President Xi Jinping has indicated that he wants it higher than that. And he has staked his reputation on it. This should be supportive of oil prices.
New major field and OPEC cuts
Although China is the biggest net oil and gas importer in the world, India is the next big thing. And BP announced on 30 June that it will start production from its third deepwater gas field in India’s KG D6 block.
At its peak, production from the KG D6 block will account for one-third of India’s domestic gas production. It will also meet approximately 15% of its gas demand.
Bullish for oil is the likelihood of further oil production cuts from the OPEC+ (OPEC plus Russia) oil cartel.
It announced a surprise cut in oil production on 4 June, pushing oil prices higher for a while. Saudi Arabia – the de facto leader of the OPEC component of the cartel – has indicated more cuts may come.
Profiting in all market conditions
BP is a major player in trading the global energy markets, with market intelligence second to none.
According to industry estimates, BP’s trading teams made around 14% of the group’s entire earnings in last year’s results.
This continued into Q1 2023 when the company announced underlying replacement cost profit for the quarter of $5bn. According to BP, this reflected an exceptional oil and gas trading result among other factors.
Commitment to shareholder rewards
For shareholders, this meant that during Q1, BP also completed $2.2bn of share buybacks from surplus cash flow. Additionally positive is that it is committed to using 60% of that cash flow for future buybacks this year.
In its 2022 results, it raised the Q4 dividend payout to 6.61p per share, taking the yearly total to 24.08p. The company stated in the results that “a resilient dividend remains [our] first priority within a disciplined financial frame”.
The chief risk for the BP share price, I feel, comes if the company is pressured into expediting its transition to cleaner energy. There are also risks to its infrastructure in some of the more volatile regions in which it operates.
However, I already hold positions in BP. If I did not, then I would buy the shares now expecting them to recoup all this year’s losses at least. I would also buy them for their commitment to rewarding shareholders.
