The BP share price rose 9% in February. Is this oil stock a good investment?

Multinational oil, gas, and renewables company BP had a tough 2020. With the oil price rising, does this oil stock make a sensible ISA addition?

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Oil stocks suffered in 2020 and BP (LSE:BP) is no exception. However, I’m still feeling optimistic towards BP’s future for three reasons:

  1. The price of oil is climbing
  2. BP is diversifying
  3. BP has the expertise and access to capital to excel in green energy R&D

A volatile commodity

The price of oil has been volatile for decades, and prior to the pandemic hitting there were murmurings of us approaching peak oil. And Covid-19 causing a blanket closure on the global economy and mass disruption to international travel has undoubtedly enhanced this theory.

Whether peak oil has been and gone or is yet to come, is neither here nor there. The world is on a mission to find a viable fossil-fuel replacement, and oil’s day’s will eventually be numbered. However, that time is not yet here. And I believe the repercussions of the pandemic-inflicted supply crunch will push the price of oil up for the foreseeable future.

BP needs an oil price of around $42 a barrel to break even. Today the Brent crude price is around $65. While it climbs, BP is quids-in and can work on paying down debt, buying back shares, and ramping up its efforts in renewables.

Of course, this is all very well when the price of oil is climbing. But if it sinks back below $42, then BP will again be in trouble. To combat this, BP is cutting its operating costs to target a $35/barrel break-even price.

The vaccine is helping us plan a roadmap out of the pandemic prison, but we’ve still a long way to go. The slightest setback could send the price of oil plummeting again.

Pivoting from oil to renewables

Maintaining a positive outlook, I like BP because it has such an insane amount of experience and knowledge under its belt. Throughout its decades as an oil major, it has a deep understanding of how energy works. And I think that can be successfully redeployed into the renewables sector. Being a FTSE 100 company with an international presence also gives it credibility and access to capital that smaller competitors might not have.

BP is already exploring wind and solar, along with hydrogen power and carbon capture. These are all exciting routes to finding the perfect renewable solution. It’s also teaming up with some big names, including Equinor and Amazon Web Services. Its investment in this area currently stands at $500m, which it wants to ramp up to $5bn a year by 2030.

BP’s financial outlook

BP has a market value of £52bn. It has negative earnings per share and a generous 6% dividend yield. BP’s forward price-to-earnings ratio is 12 and its share price has risen over 11% in the past three months.

But it’s not all good news. In a year, the BP share price is down 27%. Its debt stands at £63bn, and revenue growth fell 35% year-on-year. Its free cash flow is negative and to pay down debt it needs that to turn positive. BP is targeting net debt of $35bn by early next year, based on an oil price between $45 to $50. It could presumably achieve this sooner if the oil price remains higher.

Investing in commodities is risky, but I feel confident that the world needs oil and renewables. I own shares in BP and I’d happily buy more today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen owns shares of BP. 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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