The BP (LSE: BP) share price is quite challenging to analyse because it’s in the middle of a transition. The world is rapidly moving away from dirty hydrocarbon energy towards clean renewable energies such as wind, hydrogen and solar.
BP sits in the middle of this transition. The company remains one of the world’s largest oil producers, and it also owns one of the world’s most extensive refining operations and oil trading businesses.
However, the company has committed to invest tens of billions of dollars in renewable energy over the next few years. If the group meets these ambitions it could become one of the world’s largest renewable energy suppliers.
Therefore, when analysing the BP share price, investors have to compare what the company could be to what it is today to estimate its potential value.
The value of the BP share price
This is harder than it looks. According to the company’s projections, the world may already have surpassed peak oil demand. It has projected that oil demand will never hit the level seen in 2019.
But this is just one forecast. The company has also projected that in the “business-as-usual” case, where the world doesn’t meaningfully reduce oil consumption in the next few years, demand will return to pre-Covid levels by 2025. I think these projections illustrate just how challenging it is to try and analyse the BP share price.
Nevertheless, the company’s latest forecast predicts oil demand will decline by at least 10% by 2030 and 50% by 2040.
I think these forecasts are realistic, especially considering the amount of money currently flowing into renewable energy development. Spending on renewable energy could hit $243bn worldwide in 2021, compared to $311bn for oil and gas.
As such, it seems clear to me that BP will have to spend to stay ahead of the competition. That’s just what it’s doing. The company has earmarked $50bn of capital spending over the next decade to increase its renewable energy generation.
I think this is a sensible strategy. The company is reinvesting money from its oil and gas business into renewable energy projects. This should help it manage the transition.
Risks and challenges
However, the company is likely to face challenges. The most considerable risk is the fact that BP will end up overpaying for new projects. This could leave it with depressed profit margins and high levels of debt. The organisation may also be caught out by a faster-than-expected decline in oil consumption. Once again, this may leave the business with lower profit margins and less cash to invest.
Still, despite these risks, I think the BP share price presents a great way to invest in the renewable energy transition. Unlike other pure-play renewable energy companies, BP’s oil cash flows give the business an advantage as it has more money to invest. This cash generation also allows the group to invest more in projects that may not deliver an immediate payout, like blue hydrogen.
That’s why I’d buy the stock for my portfolio today as a way to invest in the renewable energy revolution.
