Prior to the coronavirus crash, the last time the BP (LSE: BP) share price was as low as the current level of around 296p was in 2010. And that was immediately following the firm’s oil spill disaster in the Gulf of Mexico.
Even the bear market at the beginning of the century didn’t take it lower. Neither did the credit crunch and financial crisis in the noughties. Prior to the Macondo well disaster, we must look as far back as 1996 to find the share price as low as it is today.
The BP share price follows oil
The coronavirus pandemic caused the price of oil to collapse. It was already weak, but now oil trades at prices last seen around 2002, and at levels that were quite normal in the 1990s. So it’s perhaps unsurprising the BP share price is back where it was in the 1990s.
Major oil companies such as BP operate highly cyclical businesses. BP shares appear to be hostage to the whims of the prevailing oil price. The evidence is clear. These are on the floor and so is BP’s share price.
I’d look at BP as a cyclical investment first. That means I won’t be buying the company’s shares for their growth potential. And I won’t buying for dividend income, no matter how fat the yield.
Luckily, that approach saved me from purchasing BP shares in late January when the dividend yield looked tempting and the share price was at 485p. I said in an article back then that BP failed my basic tests for a dividend-led investment. Namely, that the record for revenue, earnings cash flow and the shareholder dividend didn’t show gradual growth. I said: “None of those measures are rising like I want them to, and that reflects in the share price chart.”
We could be at the bottom of the cycle
To me, cyclicality means risk. And we’ve seen that risk bite recently. But what about now? With the BP share price this low, should we buy? The only reason I’d buy shares in BP is to ride them up in the next up-leg of the wider economic cycle. And that recovery will be coming, although its timing is unclear.
The lockdowns relating to coronavirus will end and demand for oil will rise. Reserves will decline and the oil price will likely lift a bit. If that happens, I reckon BP’s earnings will improve and the share price could elevate to accommodate better trading.
However, with governments determined to move towards greener fuels, my guess is the days of high oil prices could be over. And we may have to get used to BP’s share price trading lower than it once did, unless the firm can produce decent operational progress in the years ahead.
Meanwhile, in an update on 1 April, BP said we are in “the most brutal environment for oil and gas businesses in decades.” However, the company reckons it’s in “great shape” with decent operating momentum and financial discipline. The directors are optimistic about the long-term outlook.
I don’t think investing in cyclical stocks is a precise science, but BP looks like it’s trading at the bottom of an economic cycle. I’m tempted to nibble at a few of the company’s shares now, but this wouldn’t be a high-conviction holding.
