Over the past 12 months, the BP(LSE: BP) share price has charged higher, tracking the rising price of oil. Since the end of June 2017, the shares have gained 30% excluding dividends, outpacing the FTSE 100's return of 5% over the same period.
And even after this impressive performance, I believe the BP share price has further to run.
BP has undergone a radical restructuring since 2014. To cope with the falling price of oil, management has slashed operating costs and capital spending. The result of these efforts is a much leaner business with fatter profit margins and cash flows.
The price of oil has now rebounded to a level not seen since 2014, and this is proving to be a huge tailwind for the group. Indeed, after publishing what CEO Bob Dudley praised as the "best earnings we have had in recent history" for 2017, the business went on to report a 71% increase in profits for the first quarter.
City analysts are expecting the company to report a total net profit for 2018 of $11bn, nearly double 2017's number of $6.2bn. On a per share basis, analysts have pencilled in EPS of $0.54 for the year, putting the BP share price on a forward P/E of 14.1.
What really excites me about BP is the potential for cash returns to investors. The company is already paying out $6bn to investors every year via dividends and last year announced that it was re-commencing its share buyback programme. The firm is aiming to buy $1.6bn worth of shares a year in order to offset the dilutive effect of the scrip dividend programme. This won't reduce the overall number of shares in issue, but it will mean existing shareholders won't see their stake diluted by investors opting to take shares instead of a cash dividend.
According to my figures, the combination of the regular dividend and share buybacks give a total shareholder yield of 5.56% -- the total amount of money the company is returning to investors.
I expect BP's total shareholder yield to rise over the next few years as the company returns cash to investors. Analysts currently believe that the firm will generate $24bn of cash from operations this year. After deducting capital spending of $16bn, that leaves $8bn to return to investors and pay down debt.
Cash flow is projected to rise by approximately 10% per annum for the next three years, to nearly $29bn by 2020. As long as management keeps a tight grip on spending, this implies an extra $5bn of free cash could be available to BP every year by the end of the decade.
Some of these funds will go to meeting continuing liabilities from the Gulf of Mexico disaster, as well as reducing overall debt, but I believe a large portion will also be earmarked to be returned to investors.
It is this cash return potential, coupled with BP's already market-beating dividend yield and moderate P/E of 14.1 that leads me to believe the BP share price is one of the best buys in the FTSE 100.
Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it right away!
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.