I’ve been watching the BP (LSE: BP) share price carefully over the past year. I think the company has quite a bit of potential. But, as an oil producer, its fortunes are linked to the price of the black gold.
This means if the price of oil falls substantially, the company will struggle to earn a profit. That’s precisely what happened last year when the price of oil crashed below cost in most regions.
Another problem with the company’s exposure to oil concerns the environment. Oil & gas producers have been singled out as some of the largest private polluters in the world. This will continue unless these operations change their business models.
BP won’t change its business model overnight, which may put some investors off investing in the stock. Indeed, the group may also face substantial liabilities related to its polluting activities. These liabilities could threaten the company’s financial viability in a worst-case scenario.
BP share price potential
A volatile oil price and climate change are the two most significant risks the company faces right now. However, at the time of writing, the price of oil is trading at its highest level in years. And BP is also making progress on its plans to rebuild the business for the future.
As the company pushes forward with its plan to increase renewable energy output and cut its reliance on hydrocarbon production, I think the BP share price will appeal to a greater number of investors.
This could remove the cloud that’s been hanging over the business for some time. Not only will the shift towards renewable energy remove the threat of legal action against the enterprise, but it’ll also stabilise cash flows. Renewable energy production is nowhere near as volatile as the price of oil.
BP is trying to establish 20GW of renewable energy projects by 2025 and 50GW by the end of the decade. At the same time, management is planning to slowly reduce the company’s production of fossil fuels to transform from an oil producer into a clean energy business.
Wind in its sails
Of course, only time will tell if the company makes good on these ambitions. But, right now, with group profits surging off the back of high oil prices, BP has the wind at its back.
What does all of the above mean for the BP share price? I think the stock could be on the verge of a multi-year rally. The combination of high oil prices and more investment in renewable energy may attract investors back to the enterprise. Certainly following its dark-day struggles following the Gulf of Mexico disaster.
Management has also increased the appeal of the stock by hiking the group’s dividend. Alongside its first-half results, published at the beginning of August, the company increased its quarterly payout by 4% and announced an additional $1.4bn of share repurchases. Following this hike, the stock now yields 6.6%.
Considering all of the above, I think the outlook for the BP share price is improving. As such, I’d buy a small position in the stock for my portfolio as a buy and hold investment. Although I’ll be keeping a close eye on the risks outlined above.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.