I initially bought BP (LSE: BP) shares in August 2020 while oil prices remained depressed, and the oil giant was making huge losses. Since then, the BP share price has risen around 36%, mainly due to the recovery in oil prices and the company’s return to profitability. But while I like my investments to last longer than a year, I’ve decided that now’s the time to sell my shares. Here’s why.
I originally bought BP shares due to its transition into greener energy, which is occurring at a much faster pace than competitors like Royal Dutch Shell and ExxonMobil. This includes cutting oil production by around 40% in the next 10 years, selling several oil assets and raising investment in renewable energy. Green energy is surely the future and hence, I welcomed this new approach. This was a fundamental reason for my bullishness.
Nonetheless, my confidence in this strategy has started to diminish. This is because two of the company’s biggest renewable projects, Lightsource and BP Pulse, are both loss-making. Furthermore, they are not expected to reach profitability until at least 2025. This makes me fear that the company’s overall profitability is likely to be hit over the next few years and beyond.
The other concern I have is about BP’s reliance on oil prices. In fact, the only reason why profits have rebounded so significantly is because the price of oil recovered. But while the short term looks fairly bright for the price of oil, the long term looks far worse. This is due to the ever-worsening climate crisis, of which fossil fuels are a major contributor. As alternative energy sources are explored, the future for oil therefore looks fragile to me.
Despite the gradual transition into greener energy, BP is also set to remain heavily reliant on oil prices for an extremely long time. Indeed, its share buyback programme is only sustainable when oil is priced at above $60. Further, as it looks to sell many of its oil assets, this may become increasingly difficult, and they may have to be sold on the cheap. These issues are other factors that I feel could have a negative impact on the BP share price.
Why exactly have I changed my mind about BP shares?
In the past, I have written several bullish articles on BP. In particular, I pointed to the rising oil price, which has now reached $78 per barrel. Therefore, I feel that there is short-term upside potential with the BP share price. News linked to trading updates could be catalysts, especially as the company itself expects large profits in the next few quarters. Furthermore, I also expect the dividend to continue rising, and it may reach former levels at some point.
But when I make an investment, I’m looking to hold a stock for a significant period (usually around five years). For BP, the long-term future looks far too uncertain for it to stay in my portfolio. Therefore, I’ve decided that it’s time to sell.
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Stuart Blair 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.