In early February, BP (LSE: BP) agreed to sell part of its interest in an Oman gas field for $2.6bn. In addition to raising billions of dollars, the sale helped bring BP closer to its intended divestment goal of selling $25bn worth of assets by 2025. With the Oman interest sale, management is more than halfway there to the divestment goal. Here’s how I think BP’s asset divestment strategy could affect its shares and what I’d do given the current BP share price.
BP divestment strategy
I reckon management’s billion-dollar divestment strategy could be beneficial for BP for several reasons.
First, management can cut net debt faster with divestment. Once management hits their intended net debt target of $35bn, which they think they will achieve “sometime around 4Q 2021 and 1Q 2022”, BP has said before that it intends to repurchase shares again. If the buybacks are done correctly, I think it could help the BP share price.
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Second, management can increase the overall quality of its oil and gas portfolio by selling less attractive assets. With a higher quality portfolio, I reckon BP could potentially have more predictability in terms of its future income streams. Having more predictability could help management make better capital allocation decisions and perhaps even help the company’s valuation.
Third, by selling some of its oil and gas assets, management could find it easier to go green. Not only would it be cutting its fossil fuel operation with divestments, but also BP could use some of the money raised to grow its green business. In terms of its green goals, the company has an ambitious goal of increasing its net global renewable capacity to 50GW by 2030 from 3.3 GW of capacity at the end of 2020. To accomplish that, management will need substantial capital.
How the BP share price looks to me
Overall, I’d buy the stock given the current share price.
Although I don’t know what’s ahead for oil prices, I like how the price of the commodity has increased fairly substantially since October of last year.
Given the higher prices, BP’s oil and gas operation looks more attractive given that it could generate more free cash flow. I reckon management can use some of that free cash flow to buy shares once they hit their net debt target.
With this said, the shares can always go down. If oil demand doesn’t recover like the market expects due to the spread of Covid-19 variants, oil prices could go lower and that could hurt the BP share price. If management sells assets for less than the market thinks they’re worth, that divestment might not help either.
Also, more and more governments around the world are trying to reduce emissions over time, with the US government recently rejoining the Paris Agreement on climate change. With each day, there are more and more electric vehicles on the road that don’t consume potential petrol as well. Both trends present difficult challenges that could negatively affect the BP share price if management fails to adjust.
