Here’s why the BP share price could soon come under pressure (but I’m not selling up)

The BP (LSE:BP.) share price has done well lately, but it’s difficult to predict its future direction. That’s because the group’s earnings are heavily dependent on the price of oil. During the four quarters to 30 June, 72.4% of the energy giant’s contracted revenue came from oil-based products.

Over this period, the group reported a replacement cost profit before interest and tax (its preferred measure of earnings) of $13.3bn. BP reckons a $1 movement (up or down) in the price of a barrel of Brent crude will impact its profit by $340m.

Energy price forecasts

At the moment, oil’s changing hands for around $67 a barrel. But the US Energy Information Administration (EIA) is expecting this to “decline significantly” in the coming months. It’s predicting an average of $59 during the last quarter of 2025 and “around $50” in early 2026. It was last at this level at the end of 2020 when the world was slowly emerging from the worst of the pandemic.

The EIA’s forecast is based on an assumption that OPEC+ members will increase production and further add to global inventories. Indeed, a few days after it was published, the cartel confirmed it will raise output in October.

Of course, this is just one opinion, which may or may not be right. But it appears to be out of sync with the results of a recent survey of investment banks by the Wall Street Journal. The average of their expectations is a price of $62.73 in 2026.

The difference in the 2026 forecasts is worth $4.3bn to BP’s earnings.

Whatever the exact figure, it’s clear that oil economists aren’t expecting the Brent crude price to increase. And this tells me that the BP share price could come under pressure, unless something changes.

Another way

But the group could raise its earnings (and its share price) by becoming more efficient. This is best illustrated by comparing its financial performance to that of Shell, its closest rival and fellow member of the FTSE 100. Its revenue’s over 40% higher but it employs fewer people.

Shell’s distribution and administration expenses account for 4.5% of total revenue and other income. By contrast, BP’s represents 8.7%. It’s a similar story with production and manufacturing costs – 8.1% versus 13.1%.

If BP had matched the efficiency of Shell, its earnings would have been an astonishing $17.8bn higher. Based on its own calculations, that’s equivalent to $52 on a barrel of Brent crude.

That’s why I recently took a stake in BP. Not because I had high expectations that energy prices would rise but because I believe the British giant is underperforming its rivals. Fortunately, Elliott Investment Management, one of the group’s largest shareholders, is pushing for the necessary changes to be made.

I was also attracted by BP’s dividend. The stock’s currently in the top 10 of FTSE 100 yielders.

Admittedly, due to the group’s carbon footprint, it’s likely to be out of bounds to ethical fund managers. And volatile energy prices — and numerous operational risks — may put off others from taking a stake.

But due to what I perceive to be its untapped potential, I plan to hold on to my shares and it’s why other investors could consider adding some to their own portfolios.

The post Here’s why the BP share price could soon come under pressure (but I’m not selling up) appeared first on The Motley Fool UK.

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James Beard has positions in Bp P.l.c. 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.

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