Should I buy, sell or hold BP (LSE: BP) shares? This is a problem I have been trying to figure out for the past year. And it seems unlikely I am alone. Before the pandemic, BP was one of the market’s top income stocks. Rising oil prices were pushing the group’s income higher, and it was responding by returning lumps of cash to investors.
However, when the pandemic hit, the company’s income plunged. It went on to report one of the most significant losses in British corporate history. Management had to cut the dividend and shareholder returns as a result.
Unfortunately, it was not only the pandemic that forced BP to change tack last year. In recent years, the company has been facing pressure from environmental activists to diversify away from oil and gas. Last year the pressure intensified, and management finally published its ambitious plan to help the organisation transition away from hydrocarbons.
The outlook for BP shares
To my mind, BP shares look more attractive now that this plan has been published. To be blunt, I think that if BP had ignored the risk to its business model from climate change, the company would be heading for disaster.
But this is a double-edged sword. The company may avoid disaster, but it will have to spend a significant amount of money to meet its renewable energy goals.
How much will it have to spend? Well, management plans to cut the group’s oil and gas output by 40% by 2030 and spend $5bn a year on low-carbon projects. To put that into perspective, the company was expecting to deploy around $13bn on capital projects in 2021.
All of the above makes it quite challenging for me to place a value on BP shares. The company needs to invest for the future, but it is difficult to tell if its spending will yield results.
Green energy competition
The renewable energy industry is incredibly competitive. Projects’ costs are increasing, and the price of renewable energy is falling. This is squeezing profit margins for producers. It does not look as if this trend will end any time soon, with trillions of dollars set to flood the renewable energy industry over the next decade.
BP may struggle to replace its oil and gas income with green profits as profit margins are under pressure. In this scenario, the company could be a lot smaller 10 years from now than it is today.
Still, I would like to have some exposure to renewable energy in my portfolio. As such, I would acquire BP shares as a speculative play on this blossoming sector. For me, this qualifies as ‘holding’ the position. I am not willing to build a big position, but I would also not avoid the enterprise entirely.
I think the organisation has less risk than other renewable energy plays as it is already highly profitable. It can use profits from oil and gas to build its renewables business. Other companies in the sector are not so lucky.
As a reduced risk way to invest in renewable energy, I think BP shares are one of the best options on the market. As a bonus, the stock also comes with a 6.7% dividend yield.
Rupert Hargreaves 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.