BP share price cruised past key hurdle after earnings: be careful

BP (LON: BP) share price did well on Tuesday after the company published strong financial results. The shares jumped by over 5% to a high of 509p, the highest level since November 2019. They have soared by over 172% from the lowest point during the Covid-19 pandemic.

BP to scale down clean energy investments

Energy companies had a strong year in 2022, helped by high oil and natural gas prices following Russia’s invasion of Ukraine. In January, Chevron announced mixed results and boosted its share buybacks to over $75 billion. And last week, Shell and ExxonMobil published strong results, as we wrote here.

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In its fourth-quarter and full-year results, BP announced that its operating free cash flow jumped to $13.5 billion and $40 billion, respectively. Its surplus cash flow for Q4 was over $5 billion and $19.28 billion, respectively.

BP also managed to reduce its net debt to about $21.4 billion and increased its dividend by 10%. The company also said that it will repurchase $2.75 billion worth of shares. It has raised its dividend by 21% since the fourth quarter of 2021.

BP’s clean energy shifts

Another main reason why the BP share price surged is the company’s scaling down of its clean energy investments. The CEO said that the company’s oil and gas output in 2030 will be about 25% below its 2019 levels. Before that, his target was 40%.

BP, Shell, and other European oil and gas companies have been more aggressive in shifting their businesses than their American peers. That’s because European large investors are more focused on ESG than Americans. 

At the same time, European governments, including the conservative UK, have been focused on reaching net-zero targets. Shell has even been forced by a Dutch court to change its business model in favor of utilities.

As a result, BP has invested heavily on renewables as it seeks to become an integrated energy company. However, most of these investments will take longer to bear fruits. This explains why the company’s valuation gap with Chevron and Exxon has widened. BP has a forward EV to EBITDA of 2.62 while Chevron and Exxon have a multiple of 5.23 and 5.4, respectively. 

BP share price faces risks ahead

On the weekly chart, BP stock price made a strong bullish breakout above a level it has struggled to rise above for weeks. It has also risen to the 78.6% Fibonacci Retracement level. If this is not a false breakout, it means that the shares have more upside to go as buyers target the resistance at 550p. 

However, BP faces significant risks ahead. For one, it is unclear whether oil prices will remain elevated in 2023. Goldman Sachs analysts expect Brent to rise to $100 but some analysts see it falling. Besides, Brent has fallen by 41% from its 2022 high. As such, we might be near the end of the bullish cycle.

Another risk is the company’s capital allocation strategy which includes significant buybacks. If we are nearing the end of a cycle, then it means that the company is buying overpriced stock.