2020 was a really difficult year for BP (LSE:BP). Due to the pandemic, oil prices plunged and the shares did too. To pile on investor pain, not only did the share price decline by 40%+, but management also cut the quarterly dividend by 50%.
While 2020 was a terrible time for BP, I believe 2021 will be a better year.
Earnings increase?
Thanks to the rollout of Covid-19 vaccines, analysts think that the world economy will grow substantially this year and demand for oil could increase as a result.
Indeed, some organisations expect a near full recovery in terms of demand for diesel and petrol. According to the IEA’s December report, for example, demand for both could recover to 97%-99% of 2019 levels. If that happens, I believe BP’s free cash flow (FCF) could rise this year and management would be able to raise the dividend modestly.
With its FCF in excess of the dividend, I also believe the oil giant will use the extra cash to get closer to its target net debt position of $35bn. If oil prices are high enough, management could use FCF to buy back shares in Q4 too.
Going green
As for strategy, I believe BP will continue to go green in 2021 through a mixture of organic efforts and M&A.
In terms of its organic efforts, I see management continuing to expand its electric vehicle (EV) charging infrastructure network. Previously, the company’s EV charging subsidiary, BP Chargemaster, received a UK contract to deliver over 1,000 charging points over four years.
Given that the number of electric cars will only increase in the medium term, the company has plenty more opportunity to build up its fast charging stations.
But electric charging isn’t the end of the story and I think BP will work to further expand in wind and solar if the returns on investment are attractive enough.
In terms of M&A, management could become more eco-focused by divesting some oil and gas assets opportunistically and potentially doing more green deals. If management gets this right, a higher valuation could be the reward. A green makeover would not only help BP to diversify but would make its earnings more sustainable in a world that’s moving away from ‘dirty’ energy.
Less volatility
2020 really was an extraordinary year and I believe 2021 will be a less eventful one (if no less interesting). If 2021 is at least a little more like a normal year, BP’s share price volatility could be less pronounced. I’m optimistic about its prospects overall and expect earnings per share to increase.
But the market really needs to buy into management’s green transition plan. If it does, I reckon the stock has a high probability of moving higher. If the FTSE 100 continues to rise this year too, BP shares could benefit as well.
As a result, I’d buy and hold BP for the long term.
