I spoke well of BP (LSE:BP) in January and bought shares in the company. That was before stock markets, and the price of oil crashed. Shares in BP lost around half their value as the coronavirus outbreak became a pandemic. BP’s results for the first quarter of 2020 were bleak. A $4.5bn loss highlighted the effects of meagre oil prices.
BP has opted to maintain its dividend, which will cheer investors. However, this decision will place strain on BP’s balance sheet. With oil prices currently below the cost of pulling it out of the ground, BP loses money on every barrel it sells.
Planned divestments, intended to strengthen the balance sheet, won’t raise as much cash as anticipated as buyers will demand lower prices for businesses that produce oil that costs money to sell. BP is planning to cut oil and gas-related spending, which will free up some cash, but maintaining the dividend could cost the company dearly if debt continues to rise and the oil price remains low for longer than expected.
BP’s boss has expressed concern that oil demand might have already peaked, which does not bode well for prices. That leaves a large part of BP’s oil reserves, estimated to last 12 to 14 years with “normal” demand, in danger of becoming stranded assets.
Hindsight is 20/20
When I bought BP, I did not foresee a pandemic crippling the global economy. At the time, I was aware of the outbreak in China but thought something like the SARS outbreak of the 2000s would be the likely outcome. I failed to account for the fact that the world has changed, and China, and everywhere else is much more connected domestically and internationally now then it was back then.
If I could have foreseen the extent of the pandemic, I still would have bought BP, but I would have waited and bought it cheaper than I actually did. I did not buy BP because I believe fossils fuels have their best days ahead of them. I bought BP because I believe it can transition and be a force to be reckoned with in a greener future.
BP wants to be carbon-neutral by 2050. It is investing in alternative and renewable energy, and energy efficiency projects to meet that goal. Recently, BP called on governments to press ahead with tackling climate change. Maybe it just wants regulations to stop its rivals carrying on with oil and gas wholesale and without penalty.
I think BP is committed to going green and that 12 to 14 years of oil reserves should be enough to see it through the transition, without hunting for more. The question is how BP will pay for the change when the traditional business is in the doldrums. A dividend cut is warranted and may be announced later in the year. That may annoy traditional investors. However, if BP gets the message that it is changing, it will attract an entirely new shareholder base.
Saudi Arabia’s sovereign wealth fund recently bought heavily into BP. They either see it as very cheap oil and gas company or something different from the very same business that underpins their economy. Sovereign wealth funds have long time horizons and a lot of patience, and I will also have to bide my time with BP.
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James J. McCombie owns shares in BP. 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.