Veteran industry analysts say a Covid-19 vaccine won’t reinvigorate the oil price and the market could take years to recover. So what does this mean for BP (LSE:BP) shares? Here’s my view for now and into 2021.
With a 6.3% dividend yield and with a share price near 25-year lows, there appears to be value in buying the FTSE 100 energy giant.
But what’s the real story investors need to know?
BP shares the blame
The oil price has now recovered to $45 a barrel from historic low, even negative, prices in April 2020. But demand is still far below supply. And the US Energy Industry Administration thinks it will remain flat over the next two years.
At the same time, BP CEO Bernard Looney has made a bold volte-face in favour of renewable energy. This move has boosted BP shares and made for a slew of good headlines. But it’s a fact that a significant proportion of BP’s income still comes from selling oil and oil products like plastics to manufacturers.
Also, a lot of the major big-money investments BP has on the slate for the next 5–10 years remain in developing new oil discoveries. I counted five new upstream projects starting in 2020 and 18 for 2021 and beyond. The FTSE 100 giant says these will add a net of 900m barrel of oil equivalent per day to its annual production.
This kind of global diversification has its advantages. If one project fails then BP shares won’t crumble because of it.
BP Amazon play
There are better signs on the horizon for BP shares, though. For example, BP agreed a deal in December 2019 to supply Amazon’s European data centres with renewable energy. These data centres power the Amazon Web Services (AWS) cloud platform.
BP will provide AWS with 122MW of new renewable power from one of Europe’s largest onshore windfarms in Västernorrland, Sweden. This is expected to go live in 2022.
As I wrote earlier this year, AWS is essentially the utility company of the Internet. It makes Amazon $10bn a quarter and is growing at a stonking rate of 30% every three months.
So I would expect this to be a long-term partnership chucking off huge amounts of cash to aid BP shares. BP also has massive multinational subsidiaries in solar power, onshore wind, biofuels, and especially electric vehicle infrastructure.
That’s why I think BP shares will perform better than other oil supermajors like Royal Dutch Shell or ExxonMobil.
What the future holds
BP has spent decades refining its approach to squeeze the maximum profit from its oil assets worldwide.
And the £14.7bn write-down in the value of BP’s upstream projects also represents a long-term profit issue. It must be a bitter pill for long-term holders of BP shares too.
Looney’s target to ramp up BP’s renewable power capacity by 1,900% by 2030 is laudable, yes. But it will require huge amounts of capital. Analysts think it will cost BP at least $60bn to hit this target.
However, the risks of such large amounts of spending are now factored into BP shares, in my view.
So, while there are risks on the horizon, to me BP shares still represent cracking value for 2021 and beyond.
