BP Posts Record Profits In 2022. Should You Buy Its Shares Today?

BP’s share price was the leading riser on the FTSE 100 on Tuesday following the announcement of record profits in 2022.

At 507p per share the oil major was last trading 6% higher on the day.

BP shares look extremely cheap on paper. They trade on a forward price-to-earnings (P/E) ratio of 5.7 times. A FTSE 100-beating 4.4% dividend yield adds an extra sweetener for value stock investors.

Is the fossil fuel company currently too cheap to miss?

Record Profits

In today’s full-year update BP said that underlying replacement cost (RC) profits rocketed to all-time highs of $27.7 billion last year. This was more than double the $12.8 billion profit it recorded in 2021.

Oil sector earnings have ballooned following the invasion of Ukraine. Fears of constrained supply pushed crude prices through the roof last year and the Brent benchmark rose around 10% during 2022.

Prices settled back during the final quarter, however. Consequently BP’s underlying RC profits dropped to $4.8 billion. This was down sharply from $8.2 billion in the previous three months.

Cash Rich

Operating cash flow at BP meanwhile soared to $40.9 billion in 2022 from $23.6 billion a year earlier. As a result, net debt fell to $21.4 billion from $30.6 billion in 2021.

This balance sheet improvement encouraged BP to hike the fourth-quarter dividend 10% to 6.61 US cents per share. It also declared plans to repurchase $2.75 billion worth of shares.

It’s the latest in a string of share buybacks from the firm following the oil price explosion.

“Strong Returns”

BP chief executive Bernard Looney commented that “we are strengthening BP with our strongest upstream plant reliability on record and our lowest production costs in 16 years, helping to generate strong returns and reducing debt for the eleventh quarter in a row.”

He added that “we are delivering for our shareholders… with buybacks and a growing dividend. This is exactly what we said we would do and will continue to do.”

3 Reasons To Avoid BP Shares

BP has had much to celebrate in 2022. And at current prices its shares provide extremely attractive value. But I believe the company’s current valuation reflects the high level of risk it still faces.

Firstly, the near-term outlook for oil prices is highly uncertain. Ongoing supply concerns could support black gold prices as long as the war in Ukraine persists. But then demand is in danger of sinking as the global economy splutters.

Secondly, BP’s bumper results, along with Shell’s in recent days, have raised calls for the UK government to slap a windfall tax on the FTSE 100 oilies. Last week Shell recorded record adjusted earnings of $39.9 billion for 2022.

Neil Shah, executive director of content and strategy at Edison Group, comments that “the extraordinary scale of these earnings will undoubtedly once more raise the question of how governments around the world look to tax Big Oil.”

As the cost-of-living crisis endures — and Britain’s ruling Conservative party continues to tank in the polls — the pressure for prime minister Rishi Sunak to act is growing. A hike in household energy bills in April will raise calls still further.

Finally, oil-focussed companies like BP face long-term problems as the transition to green energy continues. The company has invested heavily in renewables and alternative energies like hydrogen in recent years. But oil and gas continue to drive earnings and will continue to for the foreseeable future.

Indeed, today BP said it intends to spend $8 billion a year on its oil and gas operations through to 2030. This is the same as it plans to fork out on greener sources of energy. As a potential investor I’d be looking for a higher proportion to be dedicated towards renewables and other clean sources.

All things considered, I believe there are better value stocks for FTSE 100 investors to buy right now.