The BP (LSE:BP) share price is trending up after it agreed to sell its entire Alaska oil operation, but is the energy giant a buy for value investors?
The £4.5bn sale ends 60 years of exploration in the lucrative Alaskan oil fields for BP with much more coming into the coffers as BP plans to divest £10bn in current assets over the next two years.
Looking forward
On the face of it the BP share price is a promising buy with a headline dividend yield of 6.2% on a trailing P/E ratio of just 12.
Solid dividends of 10.25 cents per share every quarter have been matched by annual payouts in the region of 40 cents per share. The fact that BP, like Royal Dutch Shell, reports earnings in US dollars, means that it too is less susceptible to volatility in the pound.
BP’s top brass have said that they will follow the likes of Shell in transitioning away from an oil-led business to focus on a lower carbon future.
Shell’s cast iron 6% dividend over the last decade makes it an attractive buy, especially since the shares are trading in the range of their 52-week low and management pushes for a move away from heavily polluting fossil fuels to grow sustainable sources.
BP may go down in history as the architect of the 2010 Deepwater oil spill crisis. And the disaster still weighs on BP’s balance sheet to the tune of $1.4bn a quarter.
But chief executive Bob Dudley has made it clear that more attention will be paid to the booming renewables market. BP is targeting 3.5m tonnes of greenhouse gas emissions reduction by 2025 and its own research shows renewables could make up 15% of the global energy market by 2040. Commenting on the Alaska sale, Dudley said: “We have other opportunities that are more closely aligned with our long-term strategy“.
Weak oil prices have hurt BP’s profit margins over the last six months and its share price too, which is down 10% for the year. To me that represents a good buy-in opportunity for value investors.
Too much debt?
One thing to watch for with the BP share price — along with other big dividend payers on the FTSE 100 — is how net gearing impacts on profitability.
Debt repayments can put downward pressure on dividends and when the accounting bods start to look for places to trim the fat, planned payouts to shareholders may be first on the chopping block.
Net debt grew slightly to $46.5bn in 2019 half-year results, compared with $38.7bn a year ago. Net gearing also crept higher to 31% from 30.4% in first-quarter results, and 27.8% 12 months ago, but City analysts suggests these levels have peaked.
CFO Brian Gilvary noted how a new accounting standard called IFRS 16, which adds previously unmentioned leased assets to company balance sheets, had come in for the first time this year, while adding that the company continued to target gearing in the 20% to 30% range.
These kinds of numbers are not unusual for the sector and brokers are also eyeing a potential dividend increase in the third or fourth quarter.
I’d rate BP a solid buy on the basis of its dividends and good leadership, with plenty of upside left for the share price to grow.
