The Covid-19 outbreak and the oil price war between Saudi Arabia and Russia (two of the world’s biggest oil producers) have delivered a one-two punch to investors worldwide. Stock prices of oil companies have simply crashed during this violent market pullback. And BP (LSE: BP) shares are among them. Let’s take a closer look at the prospects for the industry as well as the FTSE 100 oil giant.
US bailout package imminent?
Year-to-date, the price of the international oil benchmark Brent Crude has fallen from over $65 to $27 per barrel.
About two weeks ago, Russia decided to walk away from its informal co-operation with OPEC countries and expressed unwillingness to cut its output. In return, Saudi Arabia not only slashed selling prices for its oil but also decided to up oil output levels.
On the surface, it may look like Russian roulette on Saudi Arabia’s part. But many analysts actually regard it as a proxy price war between the US and Russia.
The US is currently the largest crude oil producer in the world. It’s also a sizable net exporter. Thus it’s no secret that Russia may be intentionally favouring lower prices in an attempt to derail the US shale oil boom.
Falling oil prices have cast dark clouds over this important industry. And such low prices have hit the all oil companies, including BP shares. Quite a number of US shale oil drillers have too much debt on their books. And if we have a global economic recession, demand for energy will fall fast. Therefore, the industry is likely to need the US government’s help.
And last week, US President Donald Trump said “at the appropriate time, I’ll get involved“.
Why BP shares may offer value now
In early January, BP shares were hovering around 500p. Now the price is 250p.
Although it’s quite impossible to know if oil stocks have yet bottomed out, I believe shares of oil companies such as BP are beginning look quite attractive from a risk/reward profile.
And in case of a bailout in the US as well as in other countries such as Canada, BP shares would likely see a fast move upwards. Our regular readers will know that it is an integrated company. Thus in addition to oil and gas, it operates refineries and chemicals plants, too.
Management has also been diversifying the portfolio and increasing the group’s alternative energy products, including renewable fuels and power. Furthermore, the group’s century-long expertise in the industry will likely help it weather this huge shock.
Finally, BP shares have an enticing dividend yield of around 13.9%. However, some dividend cut might be on the cards in the coming weeks.
BP shares: Foolish takeaway
The future may look even more uncertain than usual now. But those investors who can spend time to put together a shopping list of solid companies at cheap prices will likely be rewarded in the months and years to come. I believe BP shares are likely to benefit long-term investors.
Understandably, for the average investor, it’s quite hard to keep abreast of such daily developments in geopolitics. If you’re new to investing or don’t have the time to select companies, then I think you should instead buy into a FTSE 100 tracker fund.
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tezcang has no position in any of the shares mentioned. 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.