BP (LSE:BP.) shares have risen roughly 30% this year, climbing from 438p to around 565p. As a shareholder, it’s easy to see why the move has attracted attention: stronger energy prices have lifted cash generation, BP raised its dividend, and net debt fell.
So yes, the shares now look like a recovery story. But I’m unconvinced the explanation is quite that simple.
Brent crude recently traded above $100 a barrel as attacks on shipping raised fears about disrupted supplies. That’s helpful for an oil producer, but it creates a difficult question: are BP shares recovering because the business is improving, or because an oil shock is temporarily boosting the numbers?
Higher oil prices can improve revenue and cash flow quickly
For petroleum companies, the basic link’s easy to understand. When oil rises, production can become more profitable, assuming costs don’t increase by the same amount.
Still, BP’s latest figures look encouraging:
- Underlying replacement-cost profit was $5.7bn.
- Operating cash flow reached $10.9bn.
- The dividend per share increased 4% to 8.660 cents.
- Net debt fell $3.1bn to $22.3bn.
The company is refocusing on oil and gas after scaling back earlier transition ambitions. That makes the investment case easier for the market to understand. It’s also positioning itself to benefit from higher hydrocarbon prices, while using cash flow to support dividends and debt reduction.
The catch is that oil prices aren’t controlled by BP. Much of the recent spike reflects geopolitical risk, including concerns over Middle Eastern supplies. Those events can lift earnings, but they can also reverse just as quickly.
Long story, short: a temporary boost isn’t necessarily representative of sustainable progress.
The latest results still leave important questions
Q2 performance was strong financially, but it wasn’t operationally flawless. Upstream production fell to 2.2m barrels of oil equivalent per day, from 2.339m in the first quarter. Refining throughput also declined to roughly 1.5m barrels per day, compared with 1.527m previously.
The oil giant said reliability weakened and its plants didn’t run as well as in the previous quarter. That matters because investors should look beyond headline profit growth.
A better assessment involves asking whether BP is producing efficiently, improving reliability and generating stronger returns across a range of oil prices. Basically, if profits are rising mainly because Brent is above $100, the situation could suddenly flip when the market normalises.
At the end of the day, I’m not convinced the strategic reset alone has solved BP’s longer-term problems. Returning to oil and gas may improve near-term returns, but it increases exposure to commodity cycles and leaves BP competing directly with other major producers.
Reducing transition spending is two-fold: it risks limiting future profits if energy markets change.
My verdict as a shareholder
I certainly don’t plan on selling my BP shares, but I’m not yet certain this 30% rally is definitive proof of a turnaround. On the plus side, it looks financially stronger, with better cash flow and lower debt. But that alone isn’t enough evidence to suggest it’s in the early stages of an operational recovery.
So what does that mean for potential investors? Overall, I’d say the stock’s still worth considering. However, before jumping in, I’d wait to see whether BP can keep improving production, reliability and shareholder returns after oil prices settle.
Clearly, it’s being impacted to some degree by oil spikes. The question is: by how much?
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Mark Hartley owns shares in BP.
This story originally appeared on Motley Fool
