Why BP shares rose 9% in September

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

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BP (LSE: BP.) shares delivered strong returns in September. After starting the month at 488p, they ended the term at 531p – 9% higher.

So what was behind the big jump in the share price? And are the shares worth buying today?

Large share price move

The main reason the shares jumped last month was that oil prices climbed significantly over the period. At the start of September, the price of Brent crude was around $86 a barrel. However, it ended the month near $92 a barrel.

This rise in the price of oil pushed the whole Energy sector up (Shell also performed really well). That’s because higher oil prices translate to higher revenues, earnings and cash flows for companies in the industry.

As for why oil prices climbed, a lot of it was down to supply concerns. Early in the month, Saudi Arabia and Russia said that they would extend their voluntary production and export cuts until the end of 2023. These cuts amount to around 1.3m barrels a day.

The International Energy Agency (IEA) has warned that the production cuts could cause a “significant supply shortfall” by the end of this year.

Worth buying?

As to whether the shares are worth buying today, I think they look quite attractive right now. At $90+ a barrel, BP is going to be absolutely minting money. So I’d expect near-term results to be strong. And this stronger financial performance could potentially lead to higher dividends for investors.

It’s worth noting that many energy analysts expect oil prices to keep rising. Analysts at JP Morgan, for example, have said that Brent crude could hit $150 a barrel.

I’d take this forecast with a pinch of salt as energy analysts have a history of getting a bit carried away with their projections when oil is rising.

If it did hit $150 however, it would most likely boost BP’s share price significantly.

Another reason to be bullish here is that the company’s valuation is still very low. At present, analysts expect BP to generate earnings per share of around 91 cents for 2023. At today’s share price and exchange rate, that puts the stock on a forward-looking P/E ratio of about seven – way below the UK market average.

Of course, there’s also a nice dividend here. Currently, BP shares offer a yield of around 4.3%. And analysts at Morgan Stanley see the potential for strong dividend growth ahead.

There are plenty of risks to consider here however. The biggest one, to my mind, is the long-term outlook for oil. Today, the world still relies on the commodity. However, by the end of the decade, it could be a different story, given the rapid adoption of electric vehicles and renewable energy technologies.

Another risk is the fact that CEO Bernard Looney recently resigned. This adds some uncertainty in relation to the company’s shift towards renewable energy. Looney had vowed to reinvent the company and had laid out ambitious plans to achieve net zero emissions by 2050.

All things considered however, I like the risk/reward proposition on offer today.