For many years, BP (LSE: BP) was hovering around my list of potential buys. I liked two key things about the company. One, it’s a provider of an essential commodity, energy. Two, it’s been a great dividend payer for decades. BP never made it to the top of my list though, and I never bought. Considering what’s happened to the BP share price since the Covid-19 pandemic hit, I’m not too disappointed.
Looking back over the past two years, to cover the Covid-19 crisis and the 2020 stock market crash, BP shares are down 48%. The price has recovered by about 50% since the market recovery started in November, but that’s from a very low level. And the comeback might be faltering a little. The BP share price has been erratic in 2021, and has been on a bit of a downtrend since the start of March.
BP share price under pressure
That doesn’t tell the whole picture. Even before the pandemic hit, BP shares had been under pressure from a world that’s turning away from the black stuff. And that trend seems to be accelerating. Only this week, the UK government has revealed plans to accelerate its targets for cutting carbon emission. We are, it seems, now aiming to reduce emissions by 78% by 2035. That brings the target date forward by 15 years. Why now? I can’t help wondering if the pain we’ve been through over the past year might soften up any opposition to the change.
How will all this affect the BP share price? In the short to medium term, I think BP has made great strides. The pandemic led to a big fall in oil demand. BP responded by cutting costs, including capital expenditure. And it’s sold off some assets and is moving towards securing its debt and financing position. It’s doing well on it too, and should have reached its debt target “during the first quarter 2021“. As fellow Motley Fool writer Nadia Yaqub suggests, this could lead the way to the return of dividends and share buybacks. The firm has already said it’s “committed to returning at least 60% of surplus cash flow to shareholders by way of share buybacks.”
Long-term industry transformation
But none of this addresses the inevitable decline of the hydrocarbon energy business. The big question for me is, who will take over with the alternative low-carbon energy replacements? BP thinks, and hopes, it will still be BP. The company has committed to a long-term net zero carbon strategy. And the big energy firms, which already have the infrastructure for transport and processing of energy sources, should enjoy an advantage over any newcomers. So yes, I think the BP share price could represent a good investment now.
But here’s the thing that stops me. The new, net zero carbon BP will be a very different company to the existing oily BP. And the path from here to there is somewhat lacking in detail right now, especially financial detail. Should I buy shares in a good company today, in the hope that it can transform into an equally good but very different company in the future? No, that’s just too much uncertainty, and the BP share price isn’t for me.
