Despite concerns regarding the future of the oil industry, I think BP (LSE:BP) shares remain attractive for investors seeking income.
The latest results from BP revealed a 21% drop in underlying replacement cost profit, to $10bn in 2019. Despite the fall, the results were better than expected, unlike the latest results from Royal Dutch Shell and Exxon Mobil.
BP shares, which currently have a dividend yield over 6%, have traditionally appealed to investors looking for an income.
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For income investors, the future of the dividend is what matters. They need to ask themselves one question: are dividends likely to either stay at the current level or better still, increase? BP’s latest results revealed good news: dividends are being increased by 2.4%.
Oil’s future
The big concern with all oil companies relates to the future of the oil industry itself.
The oil price has remained stubbornly low over the last half decade compared to the previous five-year period. Even when speculation over a possible conflict with Iran began to dominate headlines in January, the resulting increase in the oil price was relatively modest — jumping to a six-month high. Now that the media spotlight has turned to the coronavirus, the oil price has dropped to a 12-month low.
In recent years, fracking has had a big impact on the oil cycle. Because of the way it operates, it is relatively easy to to turn fracking activity on or off. The production cost of oil sourced from fracking means that it is typically profitable at around the average price of oil over the last five years or so. As a result, fracking activity picks up quite rapidly when the oil price rises above this average and drops back when the oil price fall below. The resulting rapid changes in supply of shale oil has stopped the oil price from either rising or falling excessively. BP has responded by buying shake oil and gas assets from BHP Billiton.
Rosneft and energy transition
My enthusiasm for BP shares has another explanation, however.
Recently, Jim Cramer, CNBC’s famous investment pundit, suggested that there is no more money in oil. He is perhaps being a little hasty in making that comment, but I broadly agree. All the oil companies need to look beyond petroleum.
Of all the oil majors, I think BP is the most likely to manage this. After all, it’s got history. Before the losses from the Gulf of Mexico oil spill made it too expensive, BP tried re-branding itself as Beyond Petroleum.
Now the company is having another go and while it’s green credentials are far from perfect, I am impressed with its efforts, especially with its investments in wind farms and solar, and its joint venture with Didi in China to create an electric vehicle charging points infrastructure.
BP’s exposure to natural gas, which seems like the least carbon-expensive complement to solar and wind power, is also important.
But it’s BP’s plans to divest itself of its stake in Rosneft and the green credentials of its incoming CEO Bernard Looney that clinch it for me.
The money from the sale of the Rosneft stake will enable BP to continue to pay down debt, afford its dividend for the foreseeable future, and provide capital for further investments into what Looney calls “energy transition“. That’s why I think BP is a good buy for income investors.
