Despite its rise, BP continues to trade lower than it did five years ago. Indeed, it is still 29% down on its price from October 2016. Since then, it has experienced a number of challenges including the disruption caused by Covid-19 and the world’s pivot to cleaner forms of energy that seems to have been accelerated by the pandemic.
A recovering share price?
In my view, BP is making encouraging progress in its plans to become a greener business. Its recent updates have shown that it has continued to invest in a variety of renewables projects, including offshore wind, that have the potential to provide long-term growth opportunities.
In addition, the firm’s financial performance has improved dramatically over recent months. Factors such as a rising oil and gas price have prompted stronger earnings numbers that may have catalysed the BP share price.
Perhaps more importantly, though, higher oil and gas prices have strengthened the firm’s balance sheet and could provide greater scope, and capital, for its to invest in renewable projects to deliver on its long-term goals.
BP’s greener future
Undoubtedly, the path to relying on cleaner forms of energy is likely to take many years for BP to complete. Along the way there are likely to be several challenges, including the prospect of further Covid-related challenges in the coming months. In addition, factors such as rising global inflation may force higher interest rates that leads to slowing growth and reduced demand for oil and gas compared to today’s levels.
However, BP’s share price appears to include a margin of safety despite its recent outperformance of the FTSE 100 index. Indeed, it trades on a forward price-earnings ratio of around 7.5. This suggests that there could be capital growth potential over the long run – especially since global demand for oil is forecast to rise over the coming years due to higher sales in emerging economies.
As such, the firm may have sufficient time to gradually pivot away from fossil fuels and towards cleaner forms of energy. While this may not be a perfectly smooth journey, it could produce a more sustainable business that is able to further recover from its share price underperformance over the past five years.