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The BP (LSE: BP.) share price has had a great run recently. Year to date, it’s up about 12% – miles ahead of the FTSE 100 (+3%).
I reckon the oil stock can keep climbing. Here’s why.
Oil prices are surging
The first reason I’m positive on the outlook for BP is that oil prices are rising due to geopolitical risks and concerns in relation to supply.
Recently, the price of Brent crude oil topped $90 per barrel. That compares to a price of around $75 per barrel at the start of the year.
At $90, BP is going to be minting money. That’s because its break-even oil price is somewhere around the $40 per barrel mark.
So, I expect near-term profits to be strong.
Higher production
Next, we have the fact that the company appears to be performing quite well right now.
In an update posted earlier this week, BP said that it expects Q1 upstream production of oil to be higher compared to the previous quarter.
That said, it also noted that it expects to take a hit of $200m to $400m in its gas and low-carbon energy segment due to lower realised prices.
Oil stocks are under-owned
Another reason I’m bullish here is that oil stocks like BP are still very much under-owned in the investment community.
During Covid, a huge amount of capital left this area of the market. A lot of it never returned.
This means there’s room for money to come into the sector.
I wouldn’t be surprised to see capital flow in this year as investors look to diversify their portfolios and hedge against geopolitical risk.
Low valuation and nice dividend
Finally, the stock is cheap.
At present, BP has a price-to-earnings (P/E) ratio of just 7.7. So, there’s room for a valuation re-rating here.
As for the dividend yield, it’s currently around 4.6%. That’s an attractive yield. And it’s likely to become more attractive if interest rates fall.
BP is also buying back a ton of its own shares. This should help to boost earnings per share over time.
Notoriously unpredictable
Of course, the problem with oil stocks like BP is that they are very unpredictable. This is due to the fact that oil itself is unpredictable.
While oil prices are elevated right now, they could easily pull back later in the year. We just don’t know what will happen in the future.
Another issue is the long-term outlook. In a world that is becoming increasingly focused on sustainability, there is a fair bit of uncertainty here.
Given this unpredictability and long-term uncertainty, I won’t be buying BP shares for my own portfolio.
While I believe that they have the potential to keep rising in 2024, I think there are better options for my investment cash today.
