Bullish: Rupert Hargreaves
There are two main reasons why I would be happy to add shares in BP (LSE: BP) to my portfolio today.
The first is related to oil prices. The price of oil recently hit a multi-year high, and it doesn’t look as if this trend will end any time soon.
Investors around the world are pressuring oil and gas companies to curb their exploration and production activities. This will undoubtedly impact supply, although demand for the black gold is not falling as fast.
At the same time, oil producers have curbed exploration activity over the past 18 months to try and preserve cash in the pandemic.
These twin factors could create a supply and demand imbalance, pushing the price of oil higher still.
A rising oil price will help BP fulfil its renewable energy ambitions. This is the second reason why I would buy the stock. The company is planning to increase its renewable energy output over the next few years. I think this is a sensible decision. The world is starting to move away from hydrocarbon energy, and BP needs to change with the times. If it does not, the company could be left behind.
Management is funding the transition through a combination of asset sales and reinvesting cash flow from operations. As oil prices push higher, the group will have more capital to invest. It can return any capital leftover to shareholders.
As the stock currently supports a dividend yield of 4.8%, I think management is committed to returning cash to investors.
Rupert Hargreaves does not own shares in BP.
Bearish: Roland Head
Over the last 20 years, BP shares have fallen by 30%. Over the same period, the FTSE 100 has risen by 40%.
For many investors, BP’s dividend has been its main attraction. But last year’s dividend cut means that the payout is now back at a level last seen in 2005.
This disastrous performance has taken place while BP has been focused on its core business of oil and gas production. This is a sector where BP has huge experience and a large, skilled workforce. But the group still hasn’t been able to create reliable value for shareholders.
Today, growing concern about climate change means the group is under pressure to reduce its carbon emissions. In response, CEO Bernard Looney has promised to cut oil and gas production by 40% and spend more on renewables.
In other words, Mr Looney is asking investors to support the group’s expansion into areas where it has very little experience. I think that’s a risky bet, for shareholders at least.
Admittedly, things seem to be going surprisingly well so far. Profits have rebounded and shareholder returns are being boosted by dividends and buybacks. However, I think the high oil prices we’ve seen this year means that it’s far too soon to draw any conclusions.
Profits from fossil fuels will probably support BP’s profits for a few years yet. But I suspect the shares will continue to underperform the FTSE 100 as the group’s core business shrinks. Although BP shares may look cheap, I believe there are better options elsewhere.
Roland has no position in any of the shares mentioned.
