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Can BP shares continue outperformance after 30% oil price slump?


The BP share price [LON: BP.] has comprehensively beaten the FTSE100 since the start of the year. The oil and gas major’s shares are up 31% year-to-date, while the index is flat over the same period.

Indeed, the energy firm is 7% up since this column highlighted its investment potential in June and over 30% since we added it to our picks list last October.

However, the threat of a global economic slowdown has materially increased as high inflation prompts central banks across the developed world to rapidly raise interest rates. This has already contributed to a 30% decline in the oil price over the past three months.

Therefore, is further index outperformance ahead for BP shares? Or should investors lock in recent gains ahead of what could prove to be a challenging economic period?

A solid performance

BP’s latest results showed that it benefitted greatly from a buoyant period for commodity prices. In the first half of the year, for example, the company’s underlying replacement cost profit increased by 170% year-on-year.

This contributed to a further strengthening of its financial position, with net debt falling 17% quarter-on-quarter so that it is now 30% down on its level from a year ago. This should help the firm to overcome likely interest rate rises that put added pressure on companies with substantial leverage.

In addition, BP’s rising profitability has allowed it to pay a higher dividend. It grew by an inflation-beating 10% in the second quarter so that the company’s shares now yield around 4.5% on an annualised basis.

An uncertain future

Of course, the strong market conditions experienced by the firm in the first half of the year have not so far been replicated in the second half of the year. Indeed, the world economy now looks set to experience a marked decline in growth over the remainder of the year and next year.

Indeed, the IMF recently downgraded its forecasts for the world economy. It now expects growth to almost halve to 3.2% in the current year and to fall by a further 0.3 percentage points next year. This is likely to prompt lower demand for a range of commodities, notably oil, which could put further pressure on its price over the coming months.

Although BP has made significant progress in transitioning towards renewables, its profit remains highly dependent on fossil fuels. Therefore, an economic slowdown that results in lower oil prices is very likely to have a negative effect on its profitability.

A long-term focus

Even though BP’s share price has surged higher over recent months, it continues to trade on a low valuation. For example, it currently has a forward price-to-earnings ratio of around 5. This suggests that investors have not become overly optimistic about its prospects and there remains scope for further capital gains.

Clearly, it faces a very uncertain future as the world adjusts to a period of tighter monetary policy. But the same could be said for the vast majority of FTSE100 index members. With BP having a sound financial position and a wide margin of safety, it is well placed to continue to outperform the wider stock market over the long run.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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