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BP shares: 3 reasons I’ll avoid them

Following in the footsteps of its rival Shell, BP (LSE: BP) has now had to cut its dividend. It was a move widely expected, but that will be little comfort to investors, especially those looking for income. BP last reduced its dividend in 2010, when it was suspended for three quarters following the deadly Deepwater Horizon rig explosion.

The latest from BP

Alongside the dividend cut, BP also posted a $6.7bn quarterly loss after the coronavirus pandemic hit global demand for oil.

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Funnily enough, the bad news led to the shares rising on the day of the announcement. I expect though that the rise is a temporary reprieve. I believe the shares are likely to keep heading down. That’s one reason why I’ll be avoiding BP shares.

Why BP shares could go lower

BP shares and BP as a company are reliant on the oil price. That in turn is reliant on OPEC, which we’ve seen this year already is prone to internal disagreements that can massively impact the oil price. This lack of pricing control, I think, is a massive risk for BP.

Even a move away from oil won’t be easy. BP has said it would increase its low-carbon spending tenfold by 2030, versus current levels, to $5bn a year. That’s out of a total budget of around $15bn. And it will boost its renewable power generation to 50 gigawatts.

Over the next decade, BP forecasts that oil and gas production will fall by at least a million barrels of oil a day, or 40% compared to 2019. It plans to invest in renewables and bioenergy, as well as hydrogen, and carbon capture and storage technology.

This all costs money. Capital expenditure (capex) will remain high for a long time to come, which will keep a check on dividend growth, another reason I’ll avoid the shares.

And my third reason? BP’s huge debt should also hold back dividend growth. Even in an industry where debt is usual, BP’s seems extraordinarily high. It holds $40.9bn in net debt after raising $19bn in new debt in the second quarter.

Final word on BP shares

Many will argue that the shares are now too cheap on a trailing P/E of 18 and with the share price down around 42% over the last 12 months. Bulls can point to a recovering economy in China and potentially in other parts of the world as reasons for optimism. I’m not convinced. 

In the short term, maybe BP shares will recover. Especially now some of the expected bad news is out of the way. However, longer term I see little attraction. Even more so now the dividend is significantly lower.

I know I’ll be staying well clear of oil shares generally and as far away as I can from BP shares. The company has a problem with its debt and isn’t making the strides towards renewables that other energy companies are. I think it may be addicted to black gold, despite its new plans. The problem is its customers are becoming less and less addicted.

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Andy Ross owns no share 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.

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