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It’s simple to assume the BP (LSE:BP) share value has been falling as a result of oil costs have been heading decrease. However that’s solely a part of the issue.
Election outcomes on either side of the Atlantic have additionally modified the panorama. And I feel BP’s latest observe document’s additionally a big difficulty.
BP’s points
After a optimistic first quarter, oil costs fell in 2024. This was attributable to increased output from some OPEC+ producers accompanied by weak demand from China and a post-pandemic restoration that started to falter.
Brent crude oil 2023-24
Created at TradingView
The corporate estimates a $1 drop within the value of Brent causes a $340m fall in annual pre-tax income. And BP can’t do a lot to affect oil costs, making this a key danger.
On account of oil costs falling from April to the top of the yr, earnings per share persistently got here in decrease than the yr earlier than. However this shouldn’t be a shock for traders.
BP earnings per share (ttm) 2023-24
Created at TradingView
Anybody contemplating investing in oil shares ought to be ready for not less than some volatility as the worth of crude adjustments. With BP nonetheless, this isn’t the one danger to contemplate.
Election outcomes
With oil a commodity, the principle benefit an organization can have is decrease manufacturing prices. And elections on either side of the Atlantic considerably impacted BP final yr.
The UK elected a authorities seeking to transition away from hydrocarbons and in direction of renewables. Consequently, taxes for UK oil firms look set to rise – particularly in core operations.
Over within the US, the incoming administration appears to be like set to chop taxes and is aiming to incentivise vitality manufacturing. The mix of those developments doesn’t assist BP’s aggressive place.
Importantly although, Shell‘s going through the identical challenges. However the inventory hasn’t fared as badly in 2024, which suggests the stress on BP shares isn’t nearly oil costs and windfall taxes.
Incorrect place, unsuitable time
Over the previous couple of years, BP’s managed to get itself within the unsuitable place on the unsuitable time by way of its technique. The corporate invested closely in wind and photo voltaic vitality tasks a couple of years in the past.
Sadly, BP’s experience is in oil and gasoline. Consequently, its forays into renewable vitality technology resulted in huge losses in 2022 when it may have been cashing in on excessive oil costs.
BP earnings per share 2020-23
Created at TradingView
Since then, the agency has shifted again to its core competencies. However it appears to be doing this simply as oil costs are beginning to come down, having missed a possibility after they had been a lot increased.
Shell earnings per share 2020-23
Created at TradingView
Against this, Shell stayed targeted on hydrocarbons. And I feel this can be a key a part of why traders have been extra tolerant of its earnings falling in 2024 – they benefitted when costs had been excessive.
What now?
I feel BP now has the precise technique and the distinction in valuation means I just like the inventory higher than Shell at immediately’s costs. However I’m not ready to purchase both in the intervening time.
To some extent, the newest windfall tax developments are in all probability priced in. However I see this as an ongoing danger that’s troublesome to evaluate precisely and that’s sufficient to maintain me on the sidelines.
