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The last 12 months have been quite tough for the BP (LSE:BP.) share price. With previous management deciding to aggressively expand into renewable energy projects, the company ultimately found itself falling behind its peers like Shell and ExxonMobil.
That’s because after rising geopolitical tensions, a cost-of-living crisis, and a surge in electrical demand from artificial intelligence (AI) models, energy security became a top priority. And since fossil fuels are a far cheaper and more reliable energy source, oil & gas once again landed back on top.
During this time, BP appointed itself a new leader. And CEO Murray Auchincloss, in the new energy backdrop, decided to replace the firm’s strategy.
Fewer renewables, more fossil fuels
Diving into Auchincloss’ plans, there are a lot of details. But the highlights are pretty straightforward: slow down the expansion into renewables and increase upstream oil & gas production.
Annual investment into oil & gas projects is set to increase to $10bn through to 2027 while spending on low-carbon ventures will drop to $1.5bn-$2bn versus the original $5bn budget.
In terms of financials, if everything goes according to plan, underlying free cash flow’s expected to grow at a 20% compounded annual rate between 2024 and 2027, while the return on capital should exceed 16% by 2027 as well. At the same time, up to $5bn of structural savings is expected to be delivered by the end of the forecast period, along with up to $20bn worth of non-core divestments.
The proceeds of these achievements are going to be allocated towards a combination of future growth initiatives as well as debt reduction. Specifically, the plan is to cut the group’s current net debt position from $27bn to as low as $14bn within the next two and a half years.
Needless to say, if it can deliver on these ambitions, the business will become significantly leaner. Not just in comparison to where it is today but against its rivals as well. So with that in mind, what are the analyst forecasts for the BP share price? And how much money could investors make if they buy £1,000 worth of shares today?
Crunching the numbers
Citing the massive strategic reset of BP along with the anticipated cost reductions, the analyst team at Barclays have issued a Buy recommendation with a share price target of 525p. Compared to where the stock’s currently trading, that suggests a potential 46% return could be realised over the next 12 months. As such, investing £1,000 today could be worth £1,464 by this time next year.
However, even if BP successfully delivers on all of its operational targets, management has no control over oil & gas prices. And lately, those haven’t been trending in the right direction as other businesses seek to scale up their own production capabilities.
The evolving market conditions within the energy sector are why Barclays actually cut its BP share price forecast from 650p to 525p in April. And if the business environment doesn’t improve, another price target cut could be on the horizon.
Given the firm’s ambitious turnaround strategy, I’d like to see more progress before considering this business for my portfolio. So, investors may want to consider keeping it on their watchlists for now.
