BP (LSE: BP.) shares have soared 25% this year as the price of oil has climbed on the back of the Middle East crisis and fears over supply. Some analysts have even floated the idea that crude could briefly spike towards $200 a barrel if things escalate further.
That’s great for shareholders today, as a £5,000 investment on the day trading resumed in January would have grown by £1,250 in less than three months. But sharp rallies in cyclical stocks often come before equally sharp pull‑backs.
Should shareholders be concerned?
Tough times
Behind the scenes, BP’s been going through a bumpy patch. It’s run through two CEOs in just a few years and is now shifting the strategy back towards traditional oil and gas after a more aggressive push into renewables.
Activist investors have piled in, arguing BP has muddled its message and fallen behind rival Shell on returns and discipline.
The latest quarterly numbers didn’t calm those worries. Q4 profit dropped to $1.5bn and management hit pause on share buybacks, signaling financial stresses. Thin margins and rising costs mean the business is leaning harder on the oil price to keep earnings moving in the right direction.
Breaking down the numbers
On the income side, BP currently boasts a dividend yield of about 5%, appealing to many UK income investors. The flip side is the balance sheet. A debt‑to‑equity ratio of 1.37 points to a chunky debt pile, so the company’s more financially geared than many would like.
Earnings are down a hefty 116% year on year, underlining just how volatile profits can be when you sit in the middle of a global commodity market.
By comparison, Shell’s generally delivered stronger cash flow, fatter margins and steadier execution in recent years. And its share price has reflected that. If BP’s reset stumbles, there’s a real risk it continues to lag while Shell hoovers up the more conservative money.
Promising developments
There are still clear positives. BP’s just won US approval for its Kaskida project in the Gulf of Mexico, its first new field there since the Deepwater Horizon disaster.
If it comes online smoothly later this decade, it could add long‑life, high‑margin production that supports future dividends and buybacks. But it also brings the usual big‑project risks around cost overruns, delays and environmental scrutiny.
For shareholders, several risks exist, including an oil price correction and tighter climate policy. With high debt and thin margins, it has little to lean on if the current growth cycle turns down.
In plain terms, BP remains heavily dependent on the oil price which, right now, is very unpredictable.
The bottom line
For UK investors, BP’s long been a common feature in many ISA portfolios and I still think it’s worth considering. But it’s rapidly becoming a high‑yield, higher‑risk option that’s ever more closely hinged on the volatile energy market.
The 5% dividend, new growth projects and sheer global scale are all points in its favour. The caveat being that there could be some serious volatility along the way.
If you prefer something calmer in energy, Shell might be the easier option. But for those willing to ride out the bumps, BP remains an appealing – if somewhat shaky – candidate to keep an eye on.
