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BP share price has fallen more than 15%. Here’s what I’d do.

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Oil pipes in an oil field
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Since the middle of January, the BP (LSE: BP) share price has declined more than 15%. Concern over Covid-19 variants that could prolong the pandemic, and rather soft fourth quarter results have hurt the BP share price.

The oil giant’s recent performance has worsened its last 12-month performance, in which the BP share price has declined by over 40%.

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Although its stock fell, I’d still buy and hold BP. Here are three reasons I’m still cautiously optimistic about BP’s future.

Three reasons I’m cautiously optimistic

First, management remains confident they will achieve their goal of cutting the net debt down to $35bn from $38.9bn. Once they achieve that level and retain a strong investment-grade credit rating, they plan to commence share buybacks, according to their conference call. If the company buys back more stock, I think the oil giant’s earnings per share could look a little better.

Second, BP has cut a lot of costs as a response to the pandemic and management aims to continue to be efficient. Due to the cost reduction effort, management expects a pre-tax savings run-rate of $2.5bn for 2021 relative to 2019 levels. The oil giant could potentially realize even more savings in 2023. If management keeps up the efficiency effort, I think the company’s earnings per share could again benefit.

Third, I’m cautiously optimistic due to the outlook of ratings agency Fitch. Specifically, Fitch regards BP and Royal Dutch Shell as among the best positioned European oil majors in terms of green transition. Both companies have substantial natural gas operations which Fitch regards as “credit-positive given the robust long-term prospects of natural gas as a ‘bridge’ fuel during the transition, even after petroleum demand peaks”. Both companies also have considerable networks of fuel stations that could potentially be converted into EV or hydrogen charging stations in the future.

It should be said that both BP and Royal Dutch Shell are also big companies and thus have advantages versus many other competitors in terms of financial strength and potential project scale.

BP share price: where will oil prices go?

As I have written before, I reckon the considerable rise in oil prices has played a big part in the change in the BP share price over the past few months. If oil prices continue to strengthen considerably, I think the market would be willing to overlook a rather soft fourth-quarter earnings, and the BP share price could continue to benefit. On the other hand, BP share price could also decline meaningfully if oil prices fall.

Although I don’t know where oil prices will go next, I do think that the worst is probably over for oil in  the near term unless the Covid-19 variants get really out of control. The vaccines could really make a big difference in terms of demand for the commodity. As a result, I reckon BP doesn’t have as much short-term risk as before.

Because I think BP has a lot of value creation potential in a green transition and I reckon BP management will succeed in that transition, I’d hold BP shares.

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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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