The BP (LSE: BP) share price has fallen almost 60% this year, as the pandemic and oil price collapse have savaged the energy sector. This is only the start of the fossil fuel giant’s challenges, as it finds itself playing catch up in the transition to renewables.
BP has been a FTSE 100 stalwart since I can remember, and a favourite among income seekers due to its mighty dividend. Nothing lasts forever, though. Is the sharp decline in the BP share price a sign of worse to come, or a buying opportunity?
Investors who had written off BP will have been surprised by this week’s third-quarter update, which showed a reported loss of just $500m, down from a mind-boggling $16.8bn in the previous quarter. Management pinned this on the absence of big write-offs this quarter, and recovering oil and gas prices.
The BP share price tempts me
Unfortunately, those prices are falling again, with Brent crude down to $37.71 at time of writing, as Europe heads for a second lockdown.
While I think BP has the resources to bounce back from this year’s Covid-19 stock market crash, transitioning to zero carbon could prove more challenging. It has to make the shift while protecting its balance sheet and feeding investors the dividends they crave.
BP has net debt of just over $40bn, a fraction over its current market cap of $51.7bn (£39.8bn). It will have a job paying that down, while simultaneously funding the investment required to shift into renewables.
It is targeting $2.5bn in annual cost savings by the end of 2021, while agreeing disposals for around half its $25bn target by 2025. This includes the agreed $5bn sale of its petrochemicals business.
The income is still flowing, though. Q3 operating cash flow of $4.3bn covered its dividend. The BP share price now comes with a forecast yield of 10.9%, which makes it one of the most generous income payers on the FTSE 100. There is even talk of share buybacks restarting from 2022.
Still a top FTSE 100 income stock
In the short term, everything depends on the oil price. Which of course depends on the coronavirus. If exploration and production falls in the coming months, and energy surges back once the world gets out of lockdown, the BP share price could rebound nicely. That looks like a big ´if´ right now.
The longer-term question is whether it can profit from green energy. BP must work hard to make its old slogan Beyond Petroleum a reality.
It is entering the US offshore wind sector, and has agreed to supply Microsoft with renewable energy, but there is a long way to go. BP has an existential fight on its hands, hence its share price troubles. Today’s valuation of 12.61 times earnings is some consolation, as are those dividends, which BP says has “first call on our funds”.
Despite the risks, I would still take a punt on the BP share price at today’s price.
