Investing in oil companies like BP (LSE: BP) and Shell is not for the faint-hearted. Often their share prices are tied, to a significant extent, to the oil price. Take BP as an example: back at the end of March, its share price topped the £6 mark. Fast-forward less than four months and it is below £5. That is a fall of more than 20%.
Shell has also fallen during that period, but its 14% decline is less than that of its local rival.
So, might the BP share price come storming back?
Three issues at one time
One reason why both Shell and BP shares have gone down in recent months is that investors lowered their outlook for oil prices over that period.
In the early days of the Middle Eastern conflict, prices were high. They have since cooled, which is bad news for oil producers’ profitability.
However, the Middle Eastern situation remains unstable. It could be that the oil price jumps again if the conflict is perceived to be escalating, not de-escalating.
A second factor that has weighed on the BP share price in recent months was the abrupt departure in May of its chair. That raised questions about how well the company has been run and also whether board disputes might distract from running the business.
On top of that is a longer-term question about strategy. BP had positioned itself a few years ago very strongly in favour of non-fossil fuels. It has since weakened that strategic choice.
The conflict in the Middle East and its effect on oil prices has nonetheless highlighted once more the different impact buoyant oil prices can have on US oil majors versus British rivals that continue to juggle fossil fuels and renewables.
The basics have not changed
If the oil price gets high enough again, I reckon the BP share price could get back to £6.
Boardroom struggles are a short-term distraction but longer term, I do not think they pose a meaningful risk to the company’s financial performance.
BP remains a sizeable energy producer that has deep experience, economies of scale, and a well-known brand for downstream sales to consumers.
The big unknown remains what is going to happen to the oil price and also gas prices. Those are outside the control of any one producer, including BP.
Its current share price does not look cheap to me. Even after the recent fall, the share is still 26% higher than a year ago. Over five years, it is up by 71%.
The 5% dividend yield does look attractive. But we have seen BP cut its dividend before now and, if oil prices crash, there is the risk of a double whammy both on the share price front and when it comes to the dividend.
For now, I have no plans to buy.
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Christopher Ruane does not hold any positions in the companies mentioned.
