So far this year the BP (LSE: BP) share price has climbed by 12%. Over 12 months, the shares are down 4%, mainly due to the recent stock market volatility. Look at a three-year view and the picture is far less pretty. Over that timeframe the shares are down 50%. I think there could be a terminal decline in the share price of this FTSE 100 oil giant.
The BP share price
The BP share price I think reflects a company that is in a turnaround situation and transitioning its whole business model over the coming years.
One of the good things is the shares could potentially offer value. The forward price-to-earnings is only nine. The price-to-sales ratio is 0.66. Below one is considered cheap. The ratios, though, are roughly in line with UK-listed competitor Shell.
Investors have generally been quite wary of the fairly new CEO’s plans to go green. I think principally there are two concerns. The first is that oil is a cash cow and has done well for many investors for many years, so they would prefer to see BP stick to what it’s good at. There may also be a belief that oil will still be needed for a long time to come, alongside growing sustainably sourced energy.
The other consideration I’d imagine is that the rush for sustainable assets, for example, wind farms, will push up the costs of assets, making it harder to make money from them.
The management, however, are talking the talk on the transition. The CEO’s plan calls for a 40% reduction in oil-and-gas production over the coming decade, greater investment in low-carbon energy and a ramp-up in wind and solar power. But will it work?
Stick or twist
It’s interesting that some oil majors are sticking with oil production while others are expanding less aggressively into renewables. I’m not sure BP’s share price will do well with so much uncertainty around the direction of the company. I fear it may be in terminal decline as it’s well behind many other companies in getting into green energy. Personally, I think the outlook for oil looks bleak as well.
I could be wrong of course. The turnaround and the transition into a greener energy player could go very well, or investors could be willing to buy the shares in anticipation of more sustainable future returns. That would have the effect of pushing up the BP share price.
When it comes to investing in BP, one of the main risks is the fact the global market, not BP, control oil prices so earnings and profits can fluctuate year on year.
Overall though, the BP share price doesn’t make me want to buy. It could indeed even be in terminal decline because I’m unconvinced green energy will offer declines in oil production. This is why I believe there are better FTSE 100 companies to invest in.
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Andy Ross owns no share 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.