BP (LSE:BP) recently agreed to take a majority stake in Finite Carbon, America’s largest developer of forest carbon offsets. The British supermajor previously invested $5m in the parent company of Finite Carbon last year.
Finite Carbon connects businesses that want to offset their carbon footprints with landowners willing to adopt forest management practices that increase carbon storage. Those practices include rehabilitating understocked areas and preserving high conservation value areas.
Although the carbon offset market is largely voluntary, plenty of companies want to go green, and Finite Carbon’s services have been in high demand. To date, Finite Carbon has generated over $500m in revenue for landowners. With the recent BP deal, there is hope that the company can do even more business in the future.
Although the financial details of the recent purchase have not been disclosed, I think the deal is good for BP shares. Here’s why.
BP shares: M&A in the green sector
I think the Finite Carbon deal illustrates BP’s potential to use mergers and aquisitions to become more green. I reckon M&A can be a good thing for BP shares if done correctly.
Although the oil giant has vast resources, there are still some areas where it isn’t the strongest. BP has a lot of oil and gas experience, but it doesn’t have much experience in battery charging, for example. In those areas, M&A could help the British supermajor improve.
If management makes the right purchasing decisions, M&A can help the oil giant expand faster in areas it targets. If done correctly, M&A could also add shareholder value. Management might pay a higher than market price for a purchase. But the company could also realise efficiencies and other benefits that more than make up for the premium. Of course, that depends on management executing the integration well.
In terms of financing for M&A, the oil giant certainly has a lot of resources to make deals. Although its stock price has dropped, many analysts expect BP to generate substantial free cash flow in the coming years that it could use for further M&A. BP’s lower annual dividend also makes M&A easier as it ‘frees up’ more free cash flow.
Is the stock a buy?
The world economy could rebound rather strongly next year, and I reckon there is potential for BP shares to rise. With Pfizer’s Covid-19 vaccine now approved in both the UK and the US, there is hope that the developed world could return closer to normal by the end of next year.
If that happens, I think there is potential for increased oil consumption and improved investor sentiment about BP.
I also reckon there is upside potential if the market perceives the oil giant as more ‘green’ given the rather high current valuations that the market has awarded many green stocks. If management makes smart green M&A deals and the market remains bullish on green stocks, I think that would be another reason to buy and hold BP shares today.
Jay Yao has no position in any of the shares 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.