Over the last two weeks, BP (LSE: BP) shares have fallen by around 15%. This has left them trading at the same price as in 2010 after the Deepwater Horizon oil spill. In this event, the BP share price was able to recover quickly. This would indicate that it is too cheap at the moment. But with problems currently abounding in the oil industry, will the shares manage to stage a similar recovery?
Would I buy BP shares for its dividend?
At the moment, BP is one of the largest dividend payers in the FTSE 100, with a yield of over 10%. While this does sound very tempting, the dividend is also unsustainable. After Royal Dutch Shell cut its dividend a couple of months ago, I now believe that a BP dividend cut is imminent. Firstly, the firm is riddled with debt, and has not taken any large steps to reduce this. Its debt currently stands at around $51bn. With the dividend currently costing BP around $8bn a year, it seems sensible, therefore, that some of this money should be used to pay off the debt.
In addition, the company has recently announced that it will slash $17.5bn off the value of its oil and gas assets. This came after its long-term Brent crude price assumption was reduced from $75 a barrel to $55. This move means that BP shares are trading at a higher price-to-book ratio and its shareholders’ equity is greatly reduced. Once again, it seems evident that a dividend cut is required.
Is it time to go green?
Another reason why BP has slashed the value of its assets is because of the global shift towards greener energy. Currently, its spending on renewable energy amounts to only $500m. Seeing as this is very much the future, the recent plunge in crude oil prices should encourage it to increase its exposure to greener energy. But this leads to its own problems. Firstly, various renewable energy companies dominate the market at present. Consequently, it will not be easy for BP to make its own transition. Furthermore, the short-term effect of increased investment in renewables would be to increase its debt-to-equity ratio. With debt levels already excessive, this could place further strain on the shares.
Would I buy or sell BP shares?
Throughout this article, I have portrayed a rather gloomy outlook for BP. While I maintain that the short-term future does not look bright, I also believe that this has been priced into the current price. As a result, I cannot see the BP share price sinking significantly lower, even if it does decide to cut its dividend. But I also cannot see a significant recovery until the oil giant is able to both fortify its balance sheet and make the necessary transition into greener energy. As I can’t see this happening any time soon, I’m staying away from BP shares for the moment.
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Stuart Blair owns shares in Royal Dutch Shell. 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.