The FTSE 100 collection of stocks is loaded with excellent investment opportunities. I myself own several of the index’s blue chips including Legal & General, Diageo, and Aviva.
But there are certain Footsie shares I’m avoiding at all costs. I’m building a list of stocks to buy in 2025, but BP (LSE:BP) isn’t anywhere near it.
Oil outlook
Like mining stocks and agricultural companies, energy producers are extremely sensitive to the prices of the underlying commodity or commodities they produce.
As you can see below, BP’s share price is closely correlated to the performance of the US Oil Fund, a fund designed to track movements in the West Texas Intermediate (WTI) oil benchmark.
Now energy prices are subject to a variety of geopolitical and macroeconomic factors that impact supply and demand. This makes guessing short-term price movements tricky business.
Escalating conflict in the Middle East and fears of supply disruption could pump up crude values next year. So could further production restrictions by the OPEC+, a group responsible for 40% of worldwide output.
But on balance, I think 2025 could be another tough one for oil prices. China’s spluttering economy, rising electric vehicle (EV) sales, and soaring output from non-OPEC nations all mean crude inventories should remain well filled, putting pressure on energy values.
On Thursday (12 December) the International Energy Agency (IEA) predicted oversupply of at least 950,000 barrels a day in 2025.
Big risks
There are other reasons why I’m cool on BP shares next year.
One is the unpredictable nature of asset exploration, asset development, and oil production. Indeed, BP was forced to endure $200m to $300m worth of exploration write-offs in the last quarter alone versus the prior three months.
I’m also put off by the company’s higher operational costs versus the broader sector. This means that refining margins are much weaker than other oil majors like Shell, Chevron, and ExxonMobil.
Renewables problem
I’m not just worried about BP’s profits in the immediate future, either. I’m also concerned about the company’s plans to reduce investment in renewable energy, one which could cost it in the long run as the world weans itself off of fossil fuels.
In 2020, BP announced plans to cut oil and gas output by 40% by the end of the decade. This was then slashed to 25% in February 2023, before the firm ditched the target entirely in October.
Also this year, the FTSE 100 firm announced hiring freezes for low-carbon projects, along with stopping new offshore wind projects.
On the one hand, this makes sense as the cost of green energy projects spiral. But it’s tough to see how the company will generate profits beyond the short-to-medium term as the energy sector pivots to renewables and nuclear.
Cheap for a reason
On paper, BP’s share price offers serious value. It trades on a forward price-to-earnings (P/E) ratio of 7.7 times. Meanwhile its corresponding dividend yield is a whopping 6.7%.
But even these figures aren’t enough to encourage me to invest. There are plenty of cheap FTSE 100 shares to choose from today that offer far less risk.
