The BP share price has been on a rocky ride of late. Could now be the time to buy in?
After striking out at 21-year lows in March, BP has soared a whopping 40% in value. Still, at 325p per share, the FTSE 100 oilie’s still trading at a meaty discount to its pre-plunge levels above 450p.
Buyers would argue that it now reflects the near-term storm facing the oil market. And what a storm the world’s oil majors face. According to the International Energy Agency, worldwide oil demand will slump by 8.1m barrels per day in 2020, the biggest annual drop on record.
What’s more, consumption will only return to pre-coronavirus levels in 2022 at the earliest, the body estimates. No wonder BP slashed the valuation of its oil and gas assets by up to $17.5bn earlier today.
However, BP’s fans would argue that the recent share price correction fully reflects these near-term challenges. They might say, too, that according to conventional wisdom, the key to successful investing is to buy shares with a view to holding them for a decade or more. And this FTSE 100 share will be in great shape to ride the gradual oil price recovery and enjoy mighty profits growth over that time span, right?
I’m afraid I’m not so sure. First of all I’m worried about the possibility of prolonged oversupply in the oil market through the 2020s and possibly beyond.
Major producers (like the OPEC+ group) have been axing production following the Covid-19 outbreak on fears over a prolonged demand slump. The danger is, though, that the taps will start to be switched on again as the Brent price recovers, keeping global inventories chock-full and limiting any price rises. Countries that have invested large amounts in their oil industries like the US, Brazil, Norway, and Guyana will certainly be getting itchy trigger fingers.
It’s possible that BP might not be in as strong a position to capitalise on any sustained recovery in black gold prices. The Footsie firm also announced today that it was “reviewing its intent to develop some of its exploration prospects” in a move that could seriously damage its profits-making potential later down the line.
The BP dividend question
But let’s look at the positives to BP at current prices. City analysts are expecting the oilie’s bottom line to surge next year, leading them to predict that it will have the confidence to keep its ultra-generous dividend policy in play too. This means that dividend yields sit north of 9% for both 2020 and 2021.
I have severe reservations about whether BP will be able to meet brokers’s lofty expectations, though. With earnings expected to crumble to around 2.5 US cents per share in 2020, for instance, will it really be able to afford to pay another 41-cent annual dividend? Call me a stick in the mud, but the fact that its colossal net debt pile sits at $51.4bn and continues to grow suggests to me that the answer is ‘no.’
So forget about the BP share price, I say. It’s a share that’s loaded with risk, and one whose forward P/E ratio of 17.5 times fails to reflect this. I’d prefer to buy other FTSE 100 dividend stocks today.
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Royston Wild 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.