Oil and gas producers should stop new exploration projects from this year to hit net zero emissions goals, according to the International Energy Agency. Where does this leave the outlook for BP (LSE: BP) shares?
Personally, I think BP stock could still deliver some value for shareholders. But although I think the short-term prospects are good for oil, I reckon the long-term risks are mounting. In this piece I’m going to explain what I think BP will do next — and whether I’d buy BP shares today.
The case against BP
Calls for oil companies to stop drilling usually come from environmental campaigners. But the latest warning has come from the International Energy Agency, which has historically been a strong supporter of the oil industry.
In a new report, the IEA says that oil and gas producers should stop new exploration projects from this year if the world is to achieve net zero emissions by 2050.
BP has already promised to cut oil and gas production by 40% by 2030, and to stop exploration in new countries. But the company is still free to develop its existing assets.
IEA reports are generally taken quite seriously by governments. I think there’s a chance that today’s report could lead to tougher pressure on oil and gas producers to scale back new drilling.
In this scenario, one risk I can see is that BP might not be able to build up its sustainable business quickly enough to offset falling profits from oil and gas. If that did happen, then I think BP shares could really struggle, given the group’s $33bn net debt.
Why BP shares could still rise
Hold on a moment, though. The price of a barrel of Brent Crude has just hit $70 per barrel, a level only seen once since before the pandemic. The rising price reflects the reality we can all see. Driving, flying, and industrial activity are all starting to return to normal, after the slump caused by Covid-19.
Some investors think that cutbacks to new oil and gas projects could lead to a shortage of supplies in the coming years. Electric cars still account for a tiny minority of miles travelled and there are not any serious alternative fuels for long distance road, sea, and air travel. Similarly, gas remains the dominant fuel for heat and electricity in many countries.
If oil prices stay high for a few years, I reckon BP could do very well. The group has cut costs over the last year and profit margins are rising. If oil stays over $60, then I expect BP to produce a lot of spare cash over the next few years. Much of which this could be returned to shareholders.
My verdict
I reckon BP’s future will be built around its 20,000-strong estate of retail forecourts, plus a growing renewable business. I expect BP to gradually sell its oil and gas production assets. This will cut the group’s emissions quickly, albeit by moving them to new ownership.
I think BP will be a smaller business in the future, but it could still be a good investment. However, there’s a lot of uncertainty involved and I’m not keen to buy into this. BP shares look reasonably priced to me, with a dividend yield of nearly 5%. But I won’t be adding them to my portfolio.
