The 5 Red Flags That Make BP plc A ‘Sell’

Royston Wild looks at the problems that threaten to send BP plc (LON: BP) spiralling lower.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at the five red flags that I believe make oil giant BP (LSE: BP) a cast-iron ‘sell’ candidate.

1. Supply cuts still elusive

Much talk has been made in recent weeks concerning possible production curbs by the world’s major oil suppliers. But despite the rhetoric we are no closer to any accord actually being struck. The OPEC cartel — responsible for 40% of global supply — remains split down the middle after Saudi Arabia, Venezuela and Qatar floated the idea of freezing output last month along with non-group member Russia.

But mutual suspicion remains as the market share grab continues. OPEC sources told Reuters today that Saudi Arabia is keeping a close eye on whether Russia keeps its end of the bargain before suggesting a much-needed output cut. A reduction is therefore not likely until the end of the year at the earliest.

Besides, political fractures between the Kingdom and fellow OPEC giant Iran also threaten the possibility of a group-wide reduction, particularly as the latter plans to raise its own production to pre-sanction levels.

2. High multiple risks sell-off

We have seen similar giddiness over demand reductions wash over the market in recent times and drive crude values higher. Just last spring a steady reduction in the US shale rig count propelled Brent skywards, but this proved to be a short-term phenomenon as tanking demand indicators dragged prices lower again.

Should investor sentiment follow a similar path, I believe BP could endure a colossal sell-off. Projected earnings of 17 US cents per share for 2016 leaves the business dealing on a huge P/E multiple of 28.8 times, providing plenty of room for a hefty correction should investor optimism flag.

3. Colossal capex cuts

Of course stocks with excellent long-term growth prospects often command a hefty premium like that of BP. But I do not believe the oil giant can in any way be considered one of these.

Aside from the current supply/demand imbalance that threatens near-term crude prices, the oil giant is hardly doing its earnings prospects any favours by steadily cutting its capex targets. BP plans to spend at the lower end of the $17bn-$19bn guidance for 2016, down from $18.7bn last year. And additional cuts are widely expected as the firm battles to balance the books.

4. Failure to diversify

Another potential roadblock to long-term earnings growth is BP’s decision to double-down on the fossil fuel industry at the expense of its previous work into exploring alternative energies.

I believe BP could be seriously missing a trick here. New solar capacity in the US outpaced new gas installations for the first time in 2015, the Solar Energy Industries Association announced in February, with a record 7.3 gigawatts of capacity representing a 17% rise from 2014 levels. And demand for clean energy is likely to keep growing as politicians step up the fight against global warming.

5. Dividend in jeopardy

Sure, income investors may have cheered BP’s decision to lock the final quarterly dividend for 2015 at 10 US cents per share, resulting in a total payment of 40 cents. Many had been touting a huge reduction or even a complete cut thanks to the producer’s financial struggles — net debt surged to $27.2bn as of December from $22.6bn a year earlier.

But as bloated supply levels look set to keep oil prices on the back foot, and BP’s capital-intensive operations heap further pressure on the balance sheet, I reckon a gigantic dividend cut remains a very real possibility in the near future.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »