The BP (LSE: BP.) share price opened up around 2% higher this week as oil markets surged again. Brent futures reached $111 a barrel on Monday (18 May), with WTI at $105.
For a business that has said every $1 move in the oil price can swing pre‑tax operating profit by $340m, that kind of price action really matters.
So, is this just a short‑term spike – or the start of something lasting for BP investors?
Factors supporting further growth
When crude stays high, BP’s earnings engine usually hums. Recent quarters have shown that clearly, with the company reporting a first‑quarter underlying profit of $3.2bn.
That’s more than double the same period a year earlier, helped by what it called an “exceptional contribution” from oil trading and stronger refining margins.
So aside from refining oil, it’s cashing in on volatile energy markets,
UK policy may add another benefit, with Rachel Reeves reportedly planning to extend the current 5p per litre duty tax on motor fuel rather than raise it.
That won’t transform BP’s fortunes overnight, but holding down pump prices tends to support demand at the margin.
If oil stays expensive and governments avoid hitting drivers with extra tax, could BP’s cash flows stay stronger for longer?
The income (and value) appeal
On some measures, BP still looks surprisingly cheap. Using a discounted cash flow (DCF) model, the shares are estimated to trade around 57% below fair value. That’s based on earnings forecasts that expect growth of 10.39% per year going forward.
It won’t necessarily pan out that way, but it does echo other analysts that see BP as deeply undervalued on long‑term cash generation.
As one analyst put it, BP “appears underpriced given the strategic improvement story overlayed on a backdrop of high oil prices.”
For most investors, though, it’s the well-covered dividends that add real appeal.
- Dividend yield: 4.5%
- Dividend per share: 25p
- Cash coverage: 6.8 times
Plus, it’s already raised this year’s Q1 dividend by 4%, backed by substantial share buybacks in recent periods.
But that doesn’t mean it’s a guaranteed cash machine.
A challenging road ahead
High oil prices won’t solve all of BP’s problems. Negotiations with union members at BP’s Indiana refinery have resumed, but both sides are still far from agreeing on job security, pay and other terms.
It’s also reshaping its portfolio, having sold gas assets abroad and potentially dismantling parts of its pipeline gas trading team. That could sharpen the focus on higher‑return projects, but it also adds execution risk.
The high sensitivity to crude prices and political shocks is the core concern. If oil were to retreat sharply, or regulations tightened, would today’s ‘cheap’ valuation still look so attractive?
My verdict
Clearly, BP still has a lot to offer for investors who want exposure to traditional energy and can handle a bumpy ride. High oil prices, strong trading results and a covered 4.5% dividend certainly add appeal.
But it still faces geopolitical shocks, industrial disputes and execution risk.
For me, the income story alone is worth considering, which is why I’ll keep holding my shares even while oil swings wildly.
Mark Hartley owns shares in BP.
