With the BP share price this low, should I buy?

I don’t think investing in cyclical stocks is a precise science, but BP looks like it’s trading at the bottom of an economic cycle to me.

| 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.

Oil rig

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.

Prior to the coronavirus crash, the last time the BP (LSE: BP) share price was as low as the current level of around 296p was in 2010. And that was immediately following the firm’s oil spill disaster in the Gulf of Mexico.

Even the bear market at the beginning of the century didn’t take it lower. Neither did the credit crunch and financial crisis in the noughties. Prior to the Macondo well disaster, we must look as far back as 1996 to find the share price as low as it is today.

The BP share price follows oil

The coronavirus pandemic caused the price of oil to collapse. It was already weak, but now oil trades at prices last seen around 2002, and at levels that were quite normal in the 1990s. So it’s perhaps unsurprising the BP share price is back where it was in the 1990s.

Major oil companies such as BP operate highly cyclical businesses. BP shares appear to be hostage to the whims of the prevailing oil price. The evidence is clear. These are on the floor and so is BP’s share price.

I’d look at BP as a cyclical investment first. That means I won’t be buying the company’s shares for their growth potential. And I won’t buying for dividend income, no matter how fat the yield.

Luckily, that approach saved me from purchasing BP shares in late January when the dividend yield looked tempting and the share price was at 485p. I said in an article back then that BP failed my basic tests for a dividend-led investment. Namely, that the record for revenue, earnings cash flow and the shareholder dividend didn’t show gradual growth. I said: “None of those measures are rising like I want them to, and that reflects in the share price chart.”

We could be at the bottom of the cycle

To me, cyclicality means risk. And we’ve seen that risk bite recently. But what about now? With the BP share price this low, should we buy? The only reason I’d buy shares in BP is to ride them up in the next up-leg of the wider economic cycle. And that recovery will be coming, although its timing is unclear.

The lockdowns relating to coronavirus will end and demand for oil will rise. Reserves will decline and the oil price will likely lift a bit. If that happens, I reckon BP’s earnings will improve and the share price could elevate to accommodate better trading.

However, with governments determined to move towards greener fuels, my guess is the days of high oil prices could be over. And we may have to get used to BP’s share price trading lower than it once did, unless the firm can produce decent operational progress in the years ahead.

Meanwhile, in an update on 1 April, BP said we are in “the most brutal environment for oil and gas businesses in decades.” However, the company reckons it’s in “great shape” with decent operating momentum and financial discipline. The directors are optimistic about the long-term outlook.

I don’t think investing in cyclical stocks is a precise science, but BP looks like it’s trading at the bottom of an economic cycle. I’m tempted to nibble at a few of the company’s shares now, but this wouldn’t be a high-conviction holding.

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.

Kevin Godbold has no position in any share 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.

More on Investing Articles

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 »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »