BP Stock Price Up 17% in 2022 – Time to Buy BP Stock?

While stock markets globally have been weak in 2022, commodity stocks have been in a trajectory of their own. Commodities, where Russia is a key global player have surged in 2022 on supply disruption fears. Global energy prices have also risen to the highest level since 2008 leading to an upwards price action in energy stocks as well. British multinational energy giant BP has gained 17% in 2022.

However, BP stock has fallen almost 10% from its recent highs amid the correction in crude oil prices. What’s the forecast for the stock and should you buy in March 2022?

BP stock recent development

Amid the Russia-Ukraine war, BP has joined the long list of companies to announce an exit from Russia. The company said that it would abandon its almost 20% stake in Russian energy giant Rosneft. Rosneft accounted for almost a third of BP’s oil and gas production and almost half of its reserves. Notably, Shell had bought Russian oil at a steep discount and even tried to justify the move. However, it soon issued an apology and said that it would not buy Russian oil going forward.

Commenting on the Rosneft exit, BP CEO Bernard Looney said “I have been deeply shocked and saddened by the situation unfolding in Ukraine and my heart goes out to everyone affected. It has caused us to fundamentally rethink bp’s position with Rosneft.”

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2021 earnings

BP’s earnings rebounded in 2021 as global crude oil prices soared. It reported an underlying replacement cost profit of $12.8 billion in the fourth quarter of 2021, which was an eight-year high. Also, it generated operating cash flows of $23.6 billion despite a $5.3 billion working capital build. The company used the cash for buybacks and dividends. In 2021, it repurchased $4.15 billion worth of its shares and paid a quarterly dividend of 5.46 cents in the fourth quarter. Overall, the company generated a surplus cash flow of $6.3 billion in the year and its net debt fell to $30.6 billion at the end of 2021, which was $8.3 billion lower than the previous year.

Looney on the results

Looney expressed optimism over the earnings and said, “We call it performing while transforming.” He added, “I know I sound like a broken record but that is what we are doing. We are performing and delivering for our shareholders today, while at the same time leaning into the future and transforming the company.”

Notably, under Looney, BP has been transforming into an integrated energy company and has been aggressively pivoting towards green energy and hydrogen.

BP stock price forecast

The near-term forecast for BP stock looks bullish looking at the momentum in energy prices.  Of the 29 analysts polled by CNN Business, 20 rate BP stock as a buy or some equivalent while eight analysts have a hold rating. One analyst rates the stock as a sell. It has a median target price of $37 which is a premium of 20.3% over current prices. Its street high target price of $55 is an 80% premium over current prices while the street low target price of $29 is a discount of around 6%.

Morgan Stanley upgraded BP to overweight

Yesterday, Morgan Stanley upgraded BP stock from equal weight to overweight calling the stock undervalued. It said, “Our rating on BP was previously held back by its guidance for a strong decline in oil & gas production (down 40% by 2030), a strategy for the energy transition that struck us as particularly diverse and, most recently, its exposure to Russia. However, in each of these areas, BP has made further progress, leaving a share whose distribution capacity is undervalued, in our view.”

Morgan Stanley analyst Martijn Rats added, “BP’s [free cash flow], however, is substantially larger than its dividend. Assuming oil & gas prices in line with current forward curves (i.e. Brent falling back to $81/bbl by 2024), we estimate that BP will generate $14-17bn per year in FCF during 2022-24.”

BP stock long term forecast

For the long term, BP is focusing on renewables to fuel its growth. The company has been exiting some of the fossil fuel business and has been investing aggressively in renewable energy. While these projects might not lead to immediate returns, they would add long-term shareholder value as the world transitions towards a low carbon future.

Looney has been trying to transform the company from a fossil fuel giant to a renewable energy leader. He has announced plans to sell $25 billion worth of fossil fuel assets by 2025. BP has already sold $15 billion worth of assets under Looney. The company also intends to cut its crude oil production by 40%. While almost all the energy giants are taking of lowering their carbon footprint, BP became the first company to commit to a quantitative production cut.

Dividend and share repurchase

Meanwhile, BP does not expects the renewable businesses to become profitable by 2025. However, they would add to its long-term earnings. Also, the pivot towards clean energy would help support an expansion of the stock’s valuation multiples.

BP expects its capital expenditure to be between $14-$16 billion annually until 2025. Also, based on its forecasts, it expects to repurchase around $4 billion of its shares every year. It also expects to increase the dividends by 4% each year. Notably, these forecasts are based on an average Brent price of $60 per barrel, which now looks quite conservative. According to the data compiled by Koyfin, BP stock trades at an NTM (next-12 months) EV-to-EBITDA multiple of 3.5x, which looks attractive.

Should you buy BP stock?

The medium-term outlook for energy stocks is looking bullish and even Warren Buffett has been investing billions in energy companies. Overall, given BP’s pivot towards renewable energy, prospects of a further increase in dividends, and reasonable valuations, it looks among the best energy stocks to buy in 2021. The stock could deliver strong returns in the long term as markets appreciate its renewable energy investments.

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