In April 2010, just before the Deepwater Horizon oil spill, BP shares were changing hands for around 630p. Today, nearly 15 years later, an investor could buy one for 410p. The disaster is a reminder how dangerous the industry can be. Eleven workers lost their lives and the environmental damage was enormous. As a result, the group continues to incur legal fees.
More recently, over the past five years, the BP share price has underperformed that of Shell, its closest rival. If an investor had put £10,000 into each company in March 2020, the stake would now be worth £26,283. However, £5,911 (94%) of this increase would have been due to the performance of Shell’s share price.
Against this backdrop, on 26 February, BP organised a Capital Markets Day and announced a new strategy to help increase shareholder value.
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A new era of hydrocarbons
Central to the group’s revised approach, is a planned $10bn investment in oil and gas between now and 2027. This is 20% more than previously advised and significantly slows the group’s transition to a less carbon-intensive business model.
Those worried about the environmental impact of BP’s new strategy will be concerned that during the Q&A session with analysts, there was no mention of ‘net zero’ or ‘global warming’. And only one reference to ‘carbon footprint’.
In another move intended to reassure shareholders, over the next three years, the group wants to raise $20bn from the sale of non-core assets. Some of these funds will be used to reduce debt to $14bn-$18bn by the end of 2027. For comparison, at 31 December 2024, it stood at $23bn.
Of course, it’s easy to come up with an impressive plan but far harder to successfully implement one.
Responding to market conditions
In my opinion, the renewed emphasis on oil and gas reflects the fact that — whether we like it or not — demand continues to rise.
There’s a document on the company’s website that considers when peak demand for oil will come. It notes that there are all sorts of predictions, from now through to 2040. However, BP’s chief economist argues that the debate is misguided for two reasons. Firstly, nobody can be certain when it will happen. And more importantly from the company’s point of view, it’s largely irrelevant because oil consumption is unlikely to fall dramatically thereafter.
However, I believe the biggest impact on the company’s future financial performance will be energy prices. And these are impossible to predict with any accuracy. Also, it’s unclear how President Trump’s ‘drill, baby, drill’ message will impact prices. In theory, increasing supply will bring them down although OPEC+ members will try and stop this happening.
But despite these challenges, the stock continues to be good for income. Based on the four previous quarters, the group’s shares are presently yielding 5.9%. It plans to raise the dividend by 4% a year. And continue with share buybacks.
On balance, I think this is a buying opportunity for less risk-averse investors to consider. But I suspect those following ethical principles will be horrified at BP’s new strategy and want to steer well clear.
