The BP (LSE:BP) share price has been faltering in recent weeks and is down 15% in the past month. The firm’s profitability is very much dependent on the price of oil, which has been hammered by a lack of demand. Coronavirus has undoubtedly created a challenging year for oil companies and the majors are not exempt. How oil giants like BP and Shell proceed over the coming months will determine their future profitability and growth.
Laying the groundwork for a stronger share price
Although it is depressing for existing shareholders to see constant volatility in the BP share price, patience is key. The £62bn company appears to be sensibly opting to streamline its business and hone its strategy towards a profitable future. On Monday BP announced it is selling its petrochemicals business to Ineos, the chemicals giant, for $5bn. It expects this to complete at the end of the year. The sale brings its targeted divestments of $15bn to completion a year earlier than planned. It will also strengthen its balance sheet when cash on hand is more important than ever. This move also ties in nicely with BP’s goal to reinvent itself.
BP has a price-to-earnings ratio of 19, earnings per share are 16p and its dividend yield remains at 10% for now. This dividend makes it a very tempting FTSE 100 stock, but analysts say a cut is likely later in the year.
$100 oil is a long way off
Since the pandemic, OPEC+ members agreed to an unprecedented level of production cuts to reign in the amount of oil in storage. Meanwhile, US shale companies, not in agreement with OPEC+, have been scrambling to keep producing and storing as much as possible. A low oil price makes it harder for shale companies to remain profitable because shale is more expensive to produce than crude. This has resulted in a slew of job losses and bankruptcies, including high-profile shale driller Chesapeake Energy.
While US rig counts have been reducing, its oil inventories have been rising, reaching a record-breaking high of 541m barrels in June. You may wonder what impact the goings-on of the US energy market have on UK oil stocks, but it is important to remember the world’s oil market is intertwined. If the US has an oversupply of oil, this will suppress the oil price.
As Britain begins to open up again, the World Health Organisation has warned the coronavirus pandemic will get worse before it gets better. It is rampaging through America and the third world, and second waves are spiking in some countries that have already eased lockdown.
At the moment it looks like the oil price will stick around the $40 a barrel mark until the end of the year. On the one hand, if shale production falls far enough and global demand for oil explodes, then $100 oil could be a reality. On the other hand, cheap oil from the Middle East and a slow resurgence in demand means the likelihood of $100 oil is a distant dream. If coronavirus is eradicated, demand should return rapidly, but if countries reinforce strict lockdowns in response to second waves of the virus, recovery will be slow.
Yet I think the BP share price is cheap and is a good addition to a long-term investors portfolio, as even a 50% dividend cut would still make this a good income stock.
Are you looking for income stocks? Let the Motley Fool help you find a profitable gem for your portfolio...
With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…
As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.
With so many blue-chip and mid-cap companies scrambling to hoard cash right now, where are we income investors to turn for decent yields?
Fortunately, The Motley Fool is here to help…
Our analyst has unearthed what he believes could be a very attractive option for income- seeking investors – a company that, in his view, boasts a ‘reliably defensive’ business model, combined with a current forecast dividend yield of 4.2% to boot!*
But here’s the really exciting part…
This business even has form in riding out this kind of situation, too… having previously increased sales and profits back in 2008 and 2009 when the world was gripped in the deepest economic crisis since the Great Depression.
*Please be aware that dividends are variable and not guaranteed.
Kirsteen 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.