BP (LSE:BP) shareholders haven’t had a particularly rewarding year. The energy giant is down 5% over the past 12 months. Over five years, the BP share price has fallen 20%.
Does this fall reflect a change in its underlying business conditions? And do I think the BP share price could again hit 500p? That would take a 70% jump from today’s price – but it’s below the high point over the past year.
Dividend impact
Shareholders may not have liked the fact that BP cut its dividend last year.
Not only was the dividend reduced, it was halved. That was a deep cut and is bound to weigh on shareholder sentiment for some time.
However, with the share price languishing, the shares still pay out a 5.5% yield, which I find attractive as a dividend lover. The dividend cut has also helped shore up dividend coverage. It had fallen to a negative level in the prior year. That meant that the dividend wasn’t covered by earnings. So the new dividend policy will put less strain on the company’s finances.
I think a 5.5% yield is decent. In my view, that suggests the BP share price could climb further from its current level.
Strategy impact on the BP share price
I think one reason shareholders have cooled on BP is that the company has been vociferous about moving more into renewable power sources. There’s a risk that it could reallocate capital from profitable fossil fuel operations to less profitable alternative energy projects.
In the short term, I see that as a risk. Longer term, I expect an energy company of BP’s maturity to strike the right balance. If alternative energy sources can’t be profitably monetised I think they will quietly slip down the company’s agenda. If they do turn out to be cash generative, that could position BP well for the future. In turn that could help propel the share price higher.
Oil price
BP is just one of many energy companies to have struggled over the past year. In short, a falling oil price on the back of reduced demand fed through to lower share prices. That could continue in future, or even worsen.
Many companies responded by cutting exploration budgets. That could lead to constricted supplies several years from now. But I also think the slowdown in demand is overstated. As the pandemic recedes, I expect oil usage to return to normal levels or even higher.
While electric vehicles are a risk to big oil firms, oil has a wide range of uses where there’s no substitute. And even for electric vehicles, the electricity needs to be generated. In some cases that’s at oil-fired power stations.
BP is clearly linked to the oil price. If the oil price rises substantially over the next few years, I would expect the BP share price to follow. In that case, I could foresee it reaching 500p again at some point.
My take on the BP share price
Despite my expectation that it could hit 500p again, I’m still not buying BP for now.
I think it’s a decent income pick thanks to its yield. But the investment case has a lot of ‘ifs’. Before investing, I would prefer to wait and see how its strategy to diversify outside oil and gas pans out in practice.
