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Where will the BP share price be in 5 years?

The oil crash made global headlines when the price of US crude oil went negative on 20 April. However, by this time most oil stocks had already crashed. They haven’t yet recovered. At the time of writing, the BP (LSE: BP) share price has fallen by 35% in 2020 and its 10% dividend yield looks increasingly risky.

With doom and gloom all around, is now the time to buy BP shares for a recovery? I’ve been taking a fresh look to see how the next few years could shape up for this FTSE 100 giant.

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BP share price: the bull case

Oil bulls think that the outlook for big producers like BP could be quite strong.

Global oil production is expected to fall by about 10% in May and June, thanks to widespread production cuts. Oil traders hope this will help to balance supply with demand, which has fallen sharply due to the coronavirus pandemic.

Most oil producers are also making big cuts to planned spending. This means that new production will be delayed, or even abandoned.

Oil bulls argue that demand will bounce back quickly, as it always has done in the past. When this happens, supply could fall short of demand, pushing up oil prices to much higher levels.

In this scenario, I’d expect the BP share price to track back towards 500p, as profits surged and the dividend stayed safe.

What could go wrong?

I think there are a couple of reasons to be worried about this bullish view of the future. In the short term, it’s not yet clear how quickly the global economy will recover from the pandemic. Demand could be slightly below historic levels for some time.

Looking further ahead, the big concern is climate change. BP’s new chief executive, Bernard Looney, has committed to make the company’s operations carbon neutral by 2050.

More interestingly, Looney has also committed to a 50% cut in the carbon intensity of BP’s products by 2050. My understanding is that this means the pollution generated when the group’s energy products are consumed must fall sharply.

I think it’s possible that oil demand could start to decline over the next few years. In this scenario, oil prices might stay low for the foreseeable future. BP’s share price would probably stay low, too – and the dividend would probably be cut.

Is the 10% yield safe?

Looney has promised investors that he will provide an update on the dividend with the group’s half-year results. I think he’d be wise to cut the payout now, while he has a good excuse.

BP’s debt levels have continued to rise and reached $51.4bn at the end of the first quarter. Low oil prices will hit earnings this year and make planned asset sales more difficult. I don’t see how the payout can really be affordable.

BP share price: buy, sell, or hold?

I think BP will adapt and find ways to reduce its carbon footprint by changing the mix of products it sells. High debt levels and an unaffordable dividend will makes changes like these more difficult.

I think a dividend cut is necessary – perhaps a 50% reduction. Looking ahead, I’d say that the BP share price is probably fairly value at the moment. I’d rate the stock as a hold, rather than a buy.

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Roland Head 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.