Oil companies have experienced a challenging period in recent weeks. BP (LSE: BP) shares haven’t escaped the carnage.
The coronavirus crisis has caused demand for oil and gas products to slump. On top of this, OPEC’s decision to increase output a few weeks ago sent the price of oil plunging.
OPEC has since decided to go back on its production increases. It has also gone further by cutting production. But this hasn’t had a significant impact on the oil price yet.
And there’s currently little sign that the oil sector will return to normal in the near term.
BP shares: taking action
BP is taking steps to minimise the impact on its operations. It has cut capital spending by 25% this year to conserve cash. The energy group is now planning to spend $12bn this year, down from initial expectations for $15bn.
On top of this commitment, the oil major is planning to raise $15bn by the middle of 2021 via asset sales. Management is targeting $10bn in proceeds by the end of this year.
Selling non-core assets should help improve the company’s financial position as well as improve its profit margins.
These efforts should help it navigate through the current economic uncertainty. BP is also committed to its dividend. Its shares currently support a dividend yield of 9.7%. This makes the company one of the few stocks in the FTSE 100 that has not cut its payout recently.
The outlook for BP shares is uncertain in the short run. However, the group has a strong balance sheet and a substantial amount of cash. Asset sales and efforts to reduce spending should help bolster the company’s financial position.
This should help BP survive the unprecedented challenge facing the oil and gas sector today. The company could also use this uncertainty to reinforce its position in the industry.
If small peers end up running out of cash, the firm could snap up their assets at discounted prices. That would be good news for BP shares in the long run, even if there’s more pain for the company in the near term.
BP shares have recovered from their two-decade low of 223p, printed in the middle of March. Nonetheless, the stock remains cheap by historical standards.
Its dividend yield of 9.7% is one of the highest on record, surpassing the level reached in the depths of the financial crisis.
Although the stock could move lower in the short term, depending on the prospects for the oil and gas industry, it appears to offer excellent value for money at current levels from a long-term perspective.
On top of the capital gains potential of BP shares, in the long run, investors can also look forward to that market-beating dividend yield of 9.7%.
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Rupert Hargreaves 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.