BP (LSE: BP) shares have shown signs of a recovery recently. This month, the share price has jumped from 197p to 244p, a gain of 24%.
Should I buy shares in the FTSE 100 energy giant for my own portfolio? Let’s take a look at the investment case.
BP shares: is now the time to buy?
BP is currently one of the world’s oil ‘supermajors.’ Last year, it was the fifth largest oil and gas company in the world by revenue.
In the future, however, BP is going to look very different. That’s because earlier this year, the company announced a major transformation programme. Its goal is to pivot from being an international oil company to a global leader in the renewable energy space. It plans to have 50 gigawatts of renewables capacity by 2030 and be a ‘net zero’ business by 2050 or earlier.
To achieve its goals, BP is going to increase its investment in low carbon projects to around $5bn a year – 10 times what it invests now. It’s also planning to sell a large chunk of its oil and gas assets to help fund its transition to clean energy.
The right strategy
I think this is the right strategy to pursue. In a world that is increasingly focused on climate change and sustainability, renewable energy is the way forward. You can find more information on renewable energy stocks here.
Having said that, BP has its work cut out to execute this transformation. One issue that concerns me is the colossal investment required to make the transition. RBC analyst Biraj Borkhataria estimates that BP will have to spend about $60bn to achieve its renewables target, assuming a 50/50 split between offshore wind and solar power production. That’s a huge sum of money.
Low oil prices are hurting BP
Meanwhile, there are issues that could hold the group back. One is the low oil price. This is hurting the company’s profits. This year, analysts expect BP to generate a net loss of $3.9bn. Lower oil prices could also impact the value of the assets BP plans to offload. Rival Shell recently warned that it may slash the value of its oil and gas assets by $15bn to $22bn as a result of the oil price slump.
Another issue is the group’s weak balance sheet. At 30 September, net debt stood at $40.4bn. A debt pile of this magnitude gives the FTSE 100 company much less flexibility, as servicing debt is always a priority.
These issues lead me to believe that BP’s dividend could be at risk of another cut. Back in mid-June, I predicted that BP would cut its dividend in 2020. That prediction was spot on. In August, BP reduced its payout from 10.5 cents per share to 5.25 cents per quarter.
Now that BP has cut its payout once, I wouldn’t be surprised to see another cut. The current high yield (6.3% forecast for next year) suggests the market has its doubts over the sustainability of the dividend.
My view on BP shares
All things considered, BP is not a stock I’d buy right now.
The FTSE 100 company is heading in the right direction, but it faces many challenges. Realistically, the transformation to a renewable energy company isn’t going to be easy.
At present, I think there are better stocks to buy.
Edward Sheldon 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.