The BP (LSE: BP) share price has been dead money for the past year. The stock has returned 0% since this time last year, excluding dividends. Including dividends, the company’s performance is a little better.
Including income, the stock has produced a total return of 8.5%. In comparison, the FTSE All-Share has returned 21% over the same time frame, including dividends. Therefore, shares in the oil giant have underperformed the market by 12.5%.
But why has the BP share price underperformed so severely, and could this change anytime soon?
Push and pull
When I look at BP, I see a company in the middle of a transition. The group, which is one of the world’s largest oil and gas producers, is trying to move away from hydrocarbons. Management wants to add 50Gw of renewable energy capacity to its portfolio by 2030.
To reach this target, the company has to overcome the hurdle of cost. It’s been estimated the group will need to spend $60bn to reach the goal.
As BP can’t just magic this money out of the air, the company will continue to invest in its hydrocarbon portfolio and use the cash flow from these assets to build its renewables business.
Therefore, the company is becoming a renewable energy powerhouse. But, at the same time, it will remain a significant hydrocarbon producer for at least the next decade.
As such, it seems to me that the BP share price is being shunned by the market for its exposure to hydrocarbons but praised by some for its green energy plans. This push and pull may go some way to explaining why the stock has performed the way it has over the past 12 months.
BP share price outlook
Due to BP’s exposure to hydrocarbons, it may not be suitable for all investors. Indeed, while the group does have ambitious renewable energy targets, a lot could happen between now and 2030. If the price of oil plunges, or the cost of pollution increases, BP may not have enough cash to meet its renewable targets. This could jeopardise the company’s future.
However, I think there’s an opportunity here. If BP can build out its renewables business and successfully manage the transition away from hydrocarbons, I believe the stock could be a future green champion.
In the meantime, the BP share price currently supports a dividend yield of around 5%. This implies shareholders will be paid to wait for the company’s transition to take hold. Although I should note it seems highly probable the organisation may have to cut the dividend to fund its renewable energy spending at some point.
Still, as well as this healthy yield, the BP share price also trades at a relatively attractive price-to-earnings (P/E) multiple of 10.2. I think this low multiple reflects the uncertainty surrounding the enterprise.
Despite this uncertainty, considering the company’s valuation and growth plans, I’d buy BP for my portfolio today.
Rupert Hargreaves 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.