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Is the BP share price the ‘buy’ of the decade?

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At 237p, the BP (LSE: BP) share price is within a whisker of the low it fell to in the coronavirus crash back in March. Indeed, the bounce-back peaked out around 8 June near 370p and the trend has been down ever since.

Why the BP share price is down

Such can be the frustrations of holding a cyclical stock such as this oil giant. Indeed, macro-economic circumstances can buffet the stock and the business around. The oil price remains weak and sentiment on the stock market has deteriorated lately because of concerns about rising levels of Covid-19 infections. Indeed, if further lockdowns cause economies to weaken, BP’s business could suffer.

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But the valuation looks cheap. The forward-looking dividend yield is running near 7% and the price-to-book ratio is just below one. However, there’s a problem. Revenue, earnings, cash flow, and shareholder dividends have all been trending down. And that’s the opposite of what I look for in my investments.

I want to see all those measures rising a little year after year. If that happens, it’s a good indication I’m investing in a healthy underlying business. But, in the case of BP, the share price chart reflects the shrinking nature of operations. The broad trend has been downwards for the past 14 years.

And the company appears to have seen the writing on the wall for its business. Indeed, the world is moving away from its reliance on oil and gas. So BP has ended up swimming against the tide after all its decades in existence. And, in what looks like an acknowledgement that recovery in operations looks unlikely in their present form, BP released in August details of its new strategy.

Reinventing itself

Chairman Helge Lund said in the update, energy markets are “fundamentally changing.”  He reckons they are shifting towards low carbon, “driven by societal expectations, technology and changes in consumer preferences.” And the new plan involves moving BP from being an international oil company to being an integrated energy company.

BP’s goal is to increase its annual low carbon investment “10-fold” to around $5bn a year within 10 years. The move will see the firm invest in low carbon technologies, such as renewables, bioenergy, and “early positions” in hydrogen and Carbon Capture, Utilisation and Storage (CCUS). By 2030, BP aims to have developed around 50GW of net renewable generating capacity, which would be a 20-fold increase from 2019.

Over the same period, the directors expect the company’s oil and gas production to reduce by “at least one million barrels of oil equivalent a day,” which is around 40% from 2019 levels. The remaining hydrocarbon portfolio should be more cost and carbon resilient than it is now, they said.

So, is the BP share price the ‘buy’ of the decade? I don’t think so. To me, BP looks like a company needing to change its business model because of changing external circumstances. It may succeed and shareholders could do well from here. But I’d rather invest in other, more vibrant enterprises over the next 10 years than take a chance on BP as it reinvents itself.

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Kevin Godbold has no position in any 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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