BP (LSE: BP) has seen its shares lose 38% of their value since the Covid-19 pandemic triggered a FTSE 100 crash. Oh, and an oil crash. With oil trading at record lows, you might think I’m mad for seeing BP shares as a screaming buy right now.
To make matters worse, on Monday, the unthinkable happened. The US oil price went negative for the first time in history. Now, that’s an oil crash. But why would that make me bullish over BP shares?
The headline took a moment to sink in with me, but it means just what it implies. The US is so awash with oil production, and storage facilities are getting so full, that suppliers were actually paying buyers to take the stuff off their hands.
Good for BP shares?
Now, you don’t need me to tell you that’s no way to run an oil business. And it’s not good for BP shares, or shares in any other oil company. In fact, the BP share price dropped 6% on Tuesday morning though, as I write, it’s back to a fall of around 4% on the day.
But that negative oil price is a bit of a short-term quirk, based on trading deadlines and things like that. And here in the UK, Brent crude is changing hands for around $20 per barrel, as I write. That’s still perilously cheap, as the cost of production is higher than that for many companies. If the oil price continued at those levels for long, we could see a lot of them going bust.
Putting BP aside, If I owned shares in smaller oil companies, or ones shouldering large amounts of debt, I’d be very concerned. After the last oil crash, I bought shares in Premier Oil. But when I revisited that decision some time later, it stuck me it really wasn’t in line with my long-term strategy and was just an opportunistic punt. I accepted I had made a mistake, and I sold.
I’m very glad of that now, as Premier Oil shares have slumped to only around 20p in the oil crash. That’s a share price fall of 80% since the pandemic hit. And I think it could get even worse. Premier is saddled with close to $2bn in net debt. And though it has some cash and enough undrawn debt facilities to keep it going for a while, it’s not in a happy situation.
BP, on the other hand, isn’t going to go bust. Or, at least, if it does then I’ll probably give up on this investment lark for ever, because it’ll have shown how bad I am at it.
BP shares next year?
During the last oil crash, I predicted prices would recover to around the $75 level. That’s pretty much what happened and is down to luck, rather than any qualities I might have as an oil price guru. But where will oil be a year from now? In five years? I reckon a lot higher than today’s crisis level.
And that’s why I rate BP shares as a great buy today, for those with a long-term time horizon.
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Alan Oscroft 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.