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Will the BP share price ever get back to 500p?

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For much of 2018, BP (LSE: BP) shares were trading at above 500p, reaching a high of 603p. But the BP share price stands at just 306p as I write. That’s a loss of almost 50% from 2018’s peak. Shareholders have been getting dividends, yielding more than 6%, but that hardly compensates for such a big fall. And the annual payment was slashed in 2020.

The Covid-19 pandemic, leading to an oil price slump, was the immediate cause of BP’s share price collapse. But I’d say that really just brought forward an inevitable problem facing BP in the longer term, the need to drastically cut down on fossil fuel consumption. The company took what was probably an opportune moment in August to reveal its “New Strategy To Deliver Net Zero Ambition“.

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In it, BP detailed its plan for transition towards a post-carbon future. It includes big investment in low-carbon energy, declines in hydrocarbon production, and big cuts in its own emissions, among other steps. Had that been announced in better times, I can’t help feeling it might have given the BP share price a bit of a hammering. But as it happens, I do think it’s held back what might otherwise have been a strong recovery.

Modest BP share price recovery

BP shares have regained some value since a low in November. But we’re still looking at a 35% loss since pre-pandemic share price levels. That’s despite oil prices recovering to between $60 and $70 per barrel. And it’s also in contrast to positive first-quarter results released in April.

BP reported a profit of $4.7bn, up from just $1.4bn in the previous quarter. And operating cash flow came in at $6.1bn. Net debt was cut to $33.3bn, reaching the company’s target around a year earlier than hoped. And with all that lovely cash flow, BP announced a $500m share buyback to commence in the second quarter. So why has the BP share price not responded better?

In the short term, there must be fears of possible further Covid-19 damage around the world. India is reeling under the onslaught of the virus, and any further spread could hit oil prices yet again. But the big spectre hanging over the whole industry is surely the carbon thing.

Long-term carbon outlook

If we weren’t facing global climate change and were under no pressure to reduce fossil fuel use, I could see the BP share price already getting back above 500p. But when a company’s key product is one that is under increasing pariah status and customers are doing their best to wean themselves off it, that’s got to hurt its long-term prospects.

I see two different BPs here. One is the oil giant, reporting strong business recovery, and generating oodles of cash and handing it back to shareholders. Based on that BP, I’d rate the shares a strong buy right now, expecting them to climb back above 500p before much longer.

But the other BP is a future net-zero carbon one. And there’s no telling how profitable that might be. What would be a fair level for a net-zero carbon BP share price? I have no idea, or even any clue how to guess at it. Because of that huge uncertainty, I’m not buying.

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Alan Oscroft 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.

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