Oil supermajor BP (LSE: BP) has had a tough start to 2020. Investor sentiment towards the company took a turn for the worse in the early days of the stock market crash. As a result, BP’s share price plunged by 50% in the depths of the sell-off. Since then, the shares have risen in tandem with many stocks around the world. However, the company’s valuation is still down by 33% overall.
Business woes
This can be attributed to several factors. Perhaps most importantly, the onset of the global pandemic and the subsequent collapse in oil demand. On top of this, the oil price war between Saudi Arabia and Russia added fuel to the fire.
The plunging price of oil has hit the business hard. As a result, BP’s cash flows have turned sharply negative and the road to recovery seems long and arduous.
Consequently, the company has proceeded with some difficult decisions over recent weeks in an effort to preserve cash. For example, two weeks ago, the oil major announced it would be cutting around 10,000 jobs, which amounts to approximately 15% of its entire workforce.
On top of this, I wouldn’t be surprised if BP soon follows in the footsteps of Shell and cuts its dividend. Obviously, this would come as unwelcome news to income investors, but it would enable the company to save a huge amount of potentially vital cash.
What does the future hold for BP shares?
It’s not all doom and gloom for BP though. A fortnight ago, the FTSE 100 oil firm announced it was writing off up to $17.5bn after cutting long-term oil and gas price forecasts. The revised assumption comes in at around $55 per barrel for Brent, which seems far more realistic to me than previous predictions of around $75. Unlike some, I see this as positive news for BP in that the business is gearing up to face weaker demand and lower prices over the long term.
What’s more, at the beginning of the week, BP agreed to sell its petrochemicals business to Ineos for $5bn. The move will bolster the company’s balance sheet and also work to deliver its $15bn disinvestment target a year early. In my view, the sale marks another positive step in the future direction of the business.
Additionally, BP recently forecast that the aftermath of the global pandemic would accelerate the transition to a lower carbon economy and energy system. Having already pumped heavy amounts of cash into renewables over recent years, I think BP is favourably positioned to capitalise on the inevitable transition.
Are they worth buying?
As such, I see BP shares as a savvy long-term play. With the potential for attractive capital gains through share price appreciation and the eventual resumption of juicy dividend payments, I think it’s worth buying BP shares at today’s price.
After a 14% plunge in early June, BP shares are trading at around 311p. In my eyes, this largely discounted price offers a wide margin of safety and the potential for growth, provided the UK economy can continue to recover steadily over the coming months and years.
