BP (LSE: BP.) shares had a terrible time in 2020. We had the Covid pandemic and a stock market crash, but that wasn’t all.
The company chose that year to announced its net-zero ambitions. Yes, one of the world’s biggest oilies planned “net-zero on carbon in BP’s oil and gas production on an absolute basis by 2050 or sooner”.
That’s what it said at the time, telling us it would need a “50% cut in the carbon intensity of products BP sells by 2050 or sooner”. Might as well get the scary news out while the stock’s already down, right?
But move on to today, and the global geopolitical climate’s very different. The world’s increasingly shelving renewable energy targets. And pumping out more and more oil, pushing the cost of a barrel way down. The BP share price has gone in the opposite direction, up 90% since the lowest point of 2020.
Back in fashion
I reckon the 2020 fall was overdone, and BP still had decades of big profits in it. The market for hydrocarbon fuel was surely going to keep on going. Just perhaps in some different directions, and with different ways of exploiting the stuff.
Anyway, an investor lucky enough to buy in at the lowest point of 2020 would have done well. They could have turned £10,000 into £19,000 today. In fact, with dividends they’d have done even better.
Dividends would have added around £4,800 extra. That’s boosted by the big effective yields we could have had on such a low buying price had our timing hit it perfectly. We could have a total of £23,800 now. And I’d say that’s pretty good for an industry that was supposedly on the way out.
Billionaire investor Warren Buffett has long been bullish about the oil business. And his Berkshire Hathaway investing company has built a 27% stake in Occidental Petroleum. People who disagree with him about investing are occasionally right. But not that often.
Fundamentals
Should investors consider BP shares as a possible investment now? I think so, and I base it on valuation and forecasts. Even after such an impressive five-year share price recovery, the forward P/E’s still only a bit over 10. And if City analysts are right, it could fall as low as eight by 2027.
This year’s dividend is expected to yield an attractive 6.9%. It could grow to 7.5% in the following two years if the broker outlook is correct, based on today’s share price.
Will the cash be there to pay such rewards? We’re looking at expected cover by earnings averaging more than 1.5 times in the next few years. And at Q1 time, CEO Murray Auchincloss spoke of “our plans to strengthen the balance sheet, reduce costs, and improve cash flow and returns.“
I know the boss is supposed to sound upbeat, but I’m reading genuine confidence.
The elephant
The long-term threat to the future of the oil and gas business hasn’t gone away. And that has to be the big cloud for long-term investors. But I’m reminded again that Buffett, although he’s made mistakes, is rarely wrong.
