I’m happy to admit that I’m bullish on BP (LSE: BP) shares, but clearly a lot of investors will disagree with me.
I’m also a big supporter of Warren Buffett’s first rule of investing — don’t lose money. And that suggests we should look for reasons why not to buy a stock before we get too excited by the good stuff. So I’ll start by trying to think of reasons why not to buy BP.
More cheap oil?
The big one is that you might be wary of another oil price crash. Today we’re looking at around $76 per barrel for Brent Crude, which is a big recovery from the days of the sub-$30 level reached in early 2016. But at the same time, it’s still way short of the $110 and more the stuff commanded before the slump.
Attempts to control world oil production are also really a bit shaky, with the US pumping record volumes of the stuff and Iran back to being able to sell on the world markets. A faltering of the price recovery could damage BP shares, you might think. But let’s look at what happened to BP shares over the past five years, from mid 2014 when oil was at peak prices.
BP shares gained 24% over the period, while the FTSE 100 only managed 15%. And on top of that, BP paid out Footsie-beating dividends of around 5%-6% per year based on the current price — and you’d have done better had you bought during the 2016 dip.
Disasters
What about potential dangers like the Deepwater Horizon disaster? Well, the effect of that is a mere 6% gain from BP shares over the past 10 years. But even then you’d have been able to add about another 40% from dividends to your total — and if you’d reinvested that in more shares, that would still be a reasonable return. That’s during one of the most catastrophic decades the company has seen, which suggests to me it’s a good defensive stock.
Events like Deepwater Horizon are so rare, it wouldn’t enter into my thinking at all.
Renewables
And the worldwide drive towards renewable energy sources? That’s a genuine long-term consideration for oil investors. But it’s really not going to happen any time soon.
The EU, which is probably the most green-conscious trading bloc in the world, has an ambitious target of 32% of energy from renewable sources by 2030. I think that’s going to be very hard to achieve, and the rest of the world’s big energy consumers are some way behind the EU. BP itself reckons we might see world renewables at around the 14% mark by 2040.
And guess who one of the biggest investors in renewable energy is? Yep, BP.
Is that all?
Other than, perhaps, ethical reservations about contributing to global warming by investing in Big Oil, I really can’t see any other real reasons not to by BP. The risk of an oil supply glut is the biggest danger, I think, but there are enough producers who’d go bust at sustained low prices for that, in my view, to not be a long-term worry.
On the upside, BP shares can be picked up on a forward P/E multiple of 13 on this year’s forecasts, dropping to 12 for 2019. And with dividend yields of 5.5% on the cards, I still see a good long-term buy there.
