If you hold shares in BP (LSE: BP), my commiserations. Although, frankly, I could extend those to pretty much every investor right now. The BP share price isn’t exactly the only victim of the stock market crash, as the FTSE 100 dives to 2011 levels.
BP is an interesting case, because Covid-19 isn’t the only threat it faces right now. It’s also in the firing line of the oil price slump, as Brent crude edges ever closer to $30 a barrel. If that wasn’t bad enough, it faces further headwinds from the drive to contain climate change.
No wonder the BP share price has fallen by half in the last couple of months, from 504p to 255p. The stock market crash is only part of the story.
Stock market crash shock
The coronavirus outbreak is savaging oil demand, as people stop flying, driving and commuting. This could even drive long-term behavioural changes. If companies get used to auto-conferencing, and more people learn the delights of working at home, that would pile long-term pressure on prices, too.
Like many, I am amazed at the current Saudi Arabian strategy. The world’s swing producer (insofar as it’s so important that it can materially affect supply and prices) tried flooding the market with oil several years ago. But US shale drillers showed they could still turn a profit at $35 a barrel. The backdrop now is even less favourable, as the global economy sinks into recession, and the renewables revolution continues.
If Saudi Arabia relented, that would help the BP share price. Alternatively, the falling oil price could drive out low-margin rivals, and trigger a price recovery. If that happens, the current sell-off may have been overdone.
Cheap oil could also hamper investment in renewables, which may not look such a good investment, securing a lifeline for fossil fuels.
I’d buy the BP share price
New BP boss Bernard Looney has a lot to do as he attempts to deliver net zero carbon emissions by 2050, which will require colossal investment in new sources of energy.
Thanks to the stock market crash (down another 7.5% this morning), the BP share price looks amazing value. Last time I wrote about the company, its market-cap stood at £100bn. Today, it’s just £52bn. It now trades at just 8.6 times forecast earnings, with a quite dizzying forward dividend yield of 11.5%, something I never thought I’d see.
BP maintained its dividend through the 2014/15 oil slump, and has been working hard to ensure it can break even with oil at $40 a barrel. Its refining and petrochemical operations should actually benefit from cheaper oil. It could also save money by cutting cut back on some of the $15bn it has earmarked for capital expenditure this year alone.
At today’s price, BP looks too cheap to ignore (although it could get cheaper still). I’d say it’s a contrarian buy, albeit a riskier buy than it used to be.
