BP (LSE: BP) shares have been hit by the pandemic. But the questions I ask myself are: is the worst over and is now a buying opportunity?
The shares may have risen recently but the stock still looks cheap on a long-term basis. I think BP shares look set for recovery and I’d buy the stock today.
BP is an oil giant. So the last thing this major company needs is a fall in oil demand. But that’s exactly what happened during the pandemic.
The coronavirus crisis hit road and air travel. There was also a downturn in industrial activity. This all meant that demand for oil nosedived. Of course, this hit BP’s revenue and profitability.
BP cut its dividend, started selling assets and focused on its net debt position. While the company can’t control the oil price, it can reduce its costs and help profitability that way.
So since the pandemic, cost controls and boosting its financial position has been BP’s short-term strategy. But I should add that this can only get the company so far. Such measures gives it some breathing space for now. But a reduction in capital expenditure could impact BP’s long-term game plan. It may even leave the company trailing some competitors.
I think it’s pleasing to see that the firm is on track with its plan to get the balance sheet in some order. It announced yesterday that it expects to have reached its net debt target of $35bn during the first quarter of 2021.
But the main thing is that it has achieved the goal earlier than expected. It’s also encouraging that the company remains on track to dispose of certain assets.
So what does this all mean for investors? Well, dividends and share buybacks could be back on the horizon. In fact, in this same announcement, BP highlighted that it’s “committed to returning at least 60% of surplus cash flow to shareholders by way of share buybacks”.
The company indicated that any further information in relation to share buybacks will be provided with its first quarter 2021 results on 27 April. Of course, there’s no guarantee of dividends and share buybacks. So I’ll have to wait and see what the outcome is.
What I also like about BP shares is that it has included net zero carbon emissions as part of its long-term strategy. This means that it will be focusing on renewable — or green — energy. I see this as a sensible move and think it would be madness for it not to place an emphasis on sustainability.
But the transition from a major oil company to a renewable energy player will take time. BP recognises this and knows it will have to adopt a hybrid model in the coming years. It has highlighted that it’s transforming from an International Oil Company (IOC) into an Integrated Energy Company (IEC).
Yet the world — and BP — still depend on oil. So any further lockdowns could hinder its shares. Volatility in the oil price ultimately means lower revenues and that’s out of its control. But I think the company is making good progress with its strategy and the shares could recover from here, especially as pandemic restrictions are starting to ease. As I said at the start, I’d buy.
Nadia Yaqub 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.