The short-term fortunes of investors in BP (NYSE:BP) stock have always been closely linked to the price of oil. Higher oil prices, in general, help increase revenues, cash flows, and profits.
Thus, the plunging oil price since March has made it a difficult year for shareholders in oil companies. Given the economic uncertainty due to the coronavirus situation too, investor sentiment has quickly changed from optimism to worry or even fear.
Year-to-date, BP stock is down about 39% hovering around $23 per share.
I do not expect the shares to make a sustained leg up any time soon. I would consider buying into the share price around $18.
BP Stock Earnings at a Glance
When the oil major released Q1 results in late April, they were — as you might expect — quite dismal.
Its underlying replacement cost profit for the first quarter was $800 million, compared with $2.4 billion for the same period a year earlier. In BP terminology, underlying replacement cost profit would basically be the equivalent of adjusted net earnings.
Quarterly loss attributable to BP shareholders was $4.36 billion, compared with a profit of $2.93 billion a year ago. Management said, “Inventory holding losses of $3.7 billion, as a result of the dramatic drop in oil prices at the quarter end, were the main driver of the reported historical cost loss of $4.4 billion.”
I believe it would be important to see the next quarterly results before making a long-term investment case. InvestorPlace readers would remember that the Russia-Saudi Arabia price war started the oil price collapse in early March. And the adverse effect of the novel coronavirus pandemic on fuel demand became clear later in March.
The decrease in global energy demand may hurt the company’s upstream and downstream business further in Q2.
Finally, in April, overload of oil storage facilities has put further strain on the industry and has increased price volatility. So Q1 results may not necessarily have shown all the bad news.
Also, if oil prices stay at current low levels, the debt that most oil companies carry could easily strain their balance sheets further. Net debt at the end of Q1 was $51.4 billion, $6 billion higher than a quarter earlier. At the end of the quarter BP had around $32 billion of liquidity available.
BP aims to achieve $2.5 billion in cost savings by the end of 2021. Management wants to strengthen the balance sheet and reduce expenditure to drive its “cash balance point below $35 per barrel in 2021.”
It is no surprise that in the quarterly report, management did not commit to any sort of hard numbers for the next quarter. The outlook is still somewhat blurry.
BP Stock Price at a Glance
In mid-May 2015, BP’s stock price was around $42, and it hit a multi-year high shy of $48 in May 2018. Then it started 2020 around $40. But in March, it hit a low of $15.51. Yet today, the stock is about $23.
The stock’s compound annual growth rate over the last five years has been about -12.5%. Put another way, $1,000 invested in BP stock would have decreased to approximately $513.
Investors who bought the shares would have lost considerable capital over the past five years. But in fact, the stock’s steep losses occurred in 2020. Thus, if we had done a similar calculation in early January 2020, the results would have looked quite different.
Please note that BP is still paying a quarterly dividend and thanks to the sagging stock price, the current yield is 10.6%. The calculation above doesn’t take into consideration its dividends or reinvesting that income. I did not factor in any brokerage commissions or taxes, either.
When it reported Q1 earnings, the board decided to keep the dividend intact. Over the decades, investors have held oil companies, including BP, in high esteem, mostly thanks to robust dividends.
Although they have cheered the fact that dividends have not been suspended, they are still worried that the group may decide to axe the dividends in the rest of year. For example, in April 2020, Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) slashed its quarterly dividend by two-thirds, for the first time since in World War II.
If BP were also to decrease the dividends, then BP stock price would likely come under pressure. Morgan Stanley’s Martijn Rats has recently downgraded the shares as he sees a 50% dividend cut.
Can BP Stock Recover Soon?
Following the Great Recession of 2008-09, global central banks have cut interest rate in efforts to revive economies. And the low interest rates have helped increase values in stock as well as property markets. These two asset classes have enabled investors to get decent returns above inflation.
Dividend-paying shares, like BP stock, have been darlings especially among passive income seeking investors.
Over the past several weeks, the Fed as well as other central banks have cut interest rates further. Yet economists are now debating whether the adverse effects of the Covid-19 outbreak are a temporary blip that can once again be rectified with even cheaper money.
Although I expect our economy to get on the path to recovery sooner than later, I also believe that investors will have to come to terms with the reality that company profits can actually and will possibly fall in the coming quarters.
If you are an investor who also pays attention to technical charts, you may be interested to know that BP stock price is likely to move below $20, possibly toward $18, before it begins to stabilize.
The Bottom Line on BP
Oil prices have picked up in the past couple of weeks. As I write, Brent Crude is slightly over $30 per barrel. Compared to April’s $20 levels, this is a much better level for investors in oil stocks such as BP. On the other hand, if the price of Brent crude remains below $35, the group may have to cut dividends.
The U.K.-based oil and gas company’s history goes back to 1909. It has weathered many crises in its long history. And I expect management to take the necessary steps that will likely put the oil giant back to profitability and stability.
Therefore, I am not going to dismiss the shares. Yet in the summer months range-trading, between $17.50 and $22.50, is likely in BP stock. If you already own it, you may want to wait and ride out the choppy waters.
Alternatively, you may consider initiating an ATM covered call position, for example, with a one- or two-month horizon. A June 19- or July 17-expiry covered call would decrease the volatility in your portfolio, offer some downside protection and also enable you to participate in a potential up move.
Overall, it is still bearish times for the industry, but that may also change fast as global economies start opening up.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
