Up 153% since Covid lows! Is the BP share price at risk from ‘greenwashing’ claims?

The BP share price has increased significantly since the pandemic but are ‘greenwashing’ accusations a threat to its future profits?

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After a low of 196p in late 2020, the BP (LSE:BP.) share price steadily recovered to around 500p – a 153% increase. More recently however, growth slowed, with the shares trading between 454 and 547p.

Despite good financials, controversy regarding renewable energy goals could be strangling performance.

Financials

The BP share price looks cheap to me. It has a price-to-earnings (P/E) ratio of 6.8, below both Shell and the industry average of 7.5. Using a discounted cash flow model, analysts estimate the shares to be undervalued by 44%.

The average forecast from several independent analysts predicts a 12-month price target of around £6, up 22% from current levels. Looking at the balance sheet, a 60% debt-to-equity (D/E) ratio is acceptable, with £85.5bn in equity and interest coverage at 15.4 times.

Overall, I think BP is in a good position financially. However, the gas and oil industry is going through a difficult time.

Greenwashing accusations

Way back in 2000, BP rebranded itself from the old capitalised ‘BP’ for British Petroleum to a new lowercase ‘bp’ for beyond petroleum. Unfortunately, the lowercase writing makes for confusing print copy so everybody kept using the capitalised version. 

But there was more to it than that.

The main reason behind the rebranding was an effort to front-run what BP realised at the time: that the energy landscape was changing. It foresaw the problems fossil fuels pose and the growing need to adopt renewable energy.

Like other high-profile oil companies, BP pledged to meet ambitious climate targets to reduce its carbon footprint. The past few years have seen many of these companies adopt terms like ‘low-carbon’ and ‘net-zero’. But much like competitor Shell, BP backpedalled on its promises after realising that its renewable goals were either too costly or not reputationally critical.

As a result, it’s been accused of ‘greenwashing’.

The future of fossil fuel companies is now in a state of flux. Those that shy away from climate targets are criticised for prioritising profits over renewable investments. Many find themselves torn between adhering to climate targets or satisfying shareholders. 

The rising tide of renewable energy

Renewable energy like wind and solar is not currently efficient enough to replace fossil fuels altogether. But with research and development being heavily funded by both governments and independent organisations, it’s rapidly catching up. Smaller green energy start-ups have the lead on renewables and could eventually make BP and its peers obsolete – if they don’t adapt.

Over the next decade, I expect to see more low-carbon promises followed by the inevitable backtracking. During that time, oil and gas will likely remain profitable but eventually, the tide will turn. A less-forgiving younger generation of green energy advocates are unlikely to tolerate ‘carbon culprits’ in future markets.

Getting down to brass tacks

The world needs energy and currently most of it comes from fossil fuels. Therefore, companies delivering these commodities aren’t likely to die out soon.

BP remains a critical player in the energy landscape and is performing well enough that it could still grow from here. But a failure to make a decisive and committed transition to renewables could cost the company in the long run and negatively impact the share price.

While I don’t have cash to buy BP shares today, I’m keeping a keen eye on its renewable energy developments.

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.

Mark Hartley has positions in Shell Plc. 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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