BP (LSE:BP) has been one of the standout performers in the stock market this year. However, as I wrote earlier this month, it was also one of the most sold shares on AJ Bell‘s investment platform for that week. Therefore, I thought it wise to take a step back and see what BP shares would have delivered investors in terms of a return this year so far.
An impressive performance
BP shares are up 41% so far this year. So based on a £500 investment, it would be currently worth £705. This has vastly outstripped the 8% gain from the broader FTSE 100 this year. Yet I think there are several reasons why the rally might have further to run.
The biggest driver has undoubtedly been higher energy prices. Geopolitical tensions in the Middle East have disrupted oil supplies, pushing crude prices significantly higher. Brent averaged almost $104 a barrel during the second quarter, compared with around $81 in the first. This has provided a substantial boost to BP’s earnings and cash generation.
The company’s refining operations have also benefited. In its trading update earlier this month, BP indicated that third-quarter refining margins had roughly tripled compared with the previous year. Higher margins mean the business can generate considerably more profit from processing crude oil into petrol and diesel.
Not just oil prices
Management’s been making encouraging progress in strengthening the balance sheet. BP expects net debt to have fallen to between £10.15bn and £10.9bn at the end of September, compared with £16.77bn three months earlier. That’s a significant improvement and could eventually free up more cash for shareholder distributions.
Do I think BP shares will jump another 41% over the coming year? I believe it’s unlikely.
Oil prices remain notoriously unpredictable and volatile. Any easing of geopolitical tensions could see crude prices fall sharply, putting pressure on profitability. BP has also warned of £2.25bn in third-quarter impairments relating to its gas and low-carbon businesses, highlighting the cost of previous investment decisions.
The other point that needs to be appreciated is that after such a strong rally, expectations are considerably higher. For someone who invested £500 in January, I’d say the bias after this strong run is to hold rather than buy more.
In terms of the direction in the short term, investors will be watching both the third-quarter results on 30 October and strategy update on 15 December closely.
Ultimately, I think BP remains an interesting stock to consider. Its stronger balance sheet, disciplined spending and improving profitability provide reasons for optimism. However, following a 40% rise, I’d be more inclined to Buy on a pullback than chase the shares higher today.
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Jon Smith has no positions in the shares mentioned.
This story originally appeared on Motley Fool
