Here is why I am buying BP shares right now
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On the whole, 2020 was a tough year for the BP (LSE:BP) share price. The markets crashed in March 2020, dragging the BP share price with them. The oil price, which normally correlates well with the BP share price, also slumped in March. However, as the oil price started to climb in May 2020, the BP stock price continued to slide.
Times have been tough for the BP share price
Investors might have continued to flee BP stock because big losses were forecasted (and eventually delivered) for the quarter ending 30 June 2020. The dividend yield on BP stock fell by half due to a cut in quarterly dividends from 0.1 cents to 0.05 cents during the pandemic. Perhaps then the ongoing price slide was due to the dividend yield being readjusted. But I think something else was going on.
As calls for climate change action intensified during the pandemic, institutions started to divest from oil & gas stocks in greater numbers. Governments promised that the recovery from the coronavirus would be green. There was a forecast from BP that peak oil demand will come in the current decade. Some have argued that peak oil demand has come and gone already.
All in all, BP shares have suffered from low oil prices, dividend cuts, and becoming increasingly out of favour as an oil & gas producer.
A fossil fuel-free future
The BP stock price started to climb once its third quarter of 2020 results showed a swing back into profits. But, again, the price momentum stalled, even as the positive quarters continued to rack up in 2021. Even the 4% dividend increase and $1.4bn of share buybacks announced in the second quarter of 2021 results (which smashed expectations) have failed to really move the BP share price higher.
I think BP is in a bit of a bind. In January 2020, before the pandemic, I thought BP might be a good buy because of its moves in clean energy and recycling. In the last year or so, BP has intensified its efforts to pivot towards a renewable future. It has set itself a net zero by 2050 target but has a long way to go. The investors that shun BP for its fossil fuel involvement will not be convinced just yet. After all, BP’s revenue will come from oil & gas for some time.
BP brings expertise in managing large scale energy projects, and I am confident it can be successful in the transition. However, BP needs to go from next nothing to 50 gigawatts of renewables capacity in less than 10 years to hit one of its milestones. That suggests that the dividend might not increase much over the years and perhaps be more vulnerable, given BP’s ambitious spending plans. BP’s traditional dividend hungry investors might not fancy the stock because of this.
What’s next for the BP share price?
I do think the BP share price will move a lot higher if the company rotates away from oil and towards renewables, and the stock benefits from repricing as a clean energy company. However, this will take time. I am prepared for this and plan to hold BP stock in my portfolio for the long term.
James J. McCombie 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.