Is the BP share price the ‘buy’ of the decade?

BP aims to transform itself over the next decade with a new strategy. Meanwhile, the share price and valuation are back down near their coronavirus lows.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

At 237p, the BP (LSE: BP) share price is within a whisker of the low it fell to in the coronavirus crash back in March. Indeed, the bounce-back peaked out around 8 June near 370p and the trend has been down ever since.

Why the BP share price is down

Such can be the frustrations of holding a cyclical stock such as this oil giant. Indeed, macro-economic circumstances can buffet the stock and the business around. The oil price remains weak and sentiment on the stock market has deteriorated lately because of concerns about rising levels of Covid-19 infections. Indeed, if further lockdowns cause economies to weaken, BP’s business could suffer.

But the valuation looks cheap. The forward-looking dividend yield is running near 7% and the price-to-book ratio is just below one. However, there’s a problem. Revenue, earnings, cash flow, and shareholder dividends have all been trending down. And that’s the opposite of what I look for in my investments.

I want to see all those measures rising a little year after year. If that happens, it’s a good indication I’m investing in a healthy underlying business. But, in the case of BP, the share price chart reflects the shrinking nature of operations. The broad trend has been downwards for the past 14 years.

And the company appears to have seen the writing on the wall for its business. Indeed, the world is moving away from its reliance on oil and gas. So BP has ended up swimming against the tide after all its decades in existence. And, in what looks like an acknowledgement that recovery in operations looks unlikely in their present form, BP released in August details of its new strategy.

Reinventing itself

Chairman Helge Lund said in the update, energy markets are “fundamentally changing.”  He reckons they are shifting towards low carbon, “driven by societal expectations, technology and changes in consumer preferences.” And the new plan involves moving BP from being an international oil company to being an integrated energy company.

BP’s goal is to increase its annual low carbon investment “10-fold” to around $5bn a year within 10 years. The move will see the firm invest in low carbon technologies, such as renewables, bioenergy, and “early positions” in hydrogen and Carbon Capture, Utilisation and Storage (CCUS). By 2030, BP aims to have developed around 50GW of net renewable generating capacity, which would be a 20-fold increase from 2019.

Over the same period, the directors expect the company’s oil and gas production to reduce by “at least one million barrels of oil equivalent a day,” which is around 40% from 2019 levels. The remaining hydrocarbon portfolio should be more cost and carbon resilient than it is now, they said.

So, is the BP share price the ‘buy’ of the decade? I don’t think so. To me, BP looks like a company needing to change its business model because of changing external circumstances. It may succeed and shareholders could do well from here. But I’d rather invest in other, more vibrant enterprises over the next 10 years than take a chance on BP as it reinvents itself.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »