The energy sector had its fair share of dark days this year when the coronavirus pandemic took its toll on the nation and decimated the demand for oil. The price of oil hit rock bottom at a negative -36.20 billion and it’s unlikely that energy companies can squeeze out any type of profit this year. Oil and gas stocks now make up a measly 3% of the S&P 500. For O&G giants like BP (NYSE:BP) stock, the service they provide largely ties into the price of oil.
Given the recent trends in this sector, all arrows point to holding off on buying energy stocks. However, BP stock price is currently trending at $22.78 as of this writing, and while this is nowhere near its 52-week high of $43, it does show some upside potential.
BP Stock: Oil Prices Have Seen Better Days
The Covid-19 pandemic created fundamental challenges for economies across the globe resulting in high levels of unemployment and bankruptcy claims. Nearly one-third of the demand for oil was wiped out and analysts predict that a recovery is unlikely any time soon. A major reason for this was the sheer amount of oil in the market. Oil-rich nations like Saudi Arabia and Russia pumped out large volumes of oil with no demand to meet the supply. With flights grounded and people confined to their homes, the demand for oil was close to nil.
Since oil prices are not in their heyday, one would naturally conclude that this is not a good time for energy companies like BP. After all, the company plays an active role in the upstream, midstream and downstream segments of the oil production process. Collectively, they produce nearly 3.7 million barrels of crude oil each day. Although natural gas is also part of its product portfolio, oil has always been BP’s cash cow. The oil is shipped to service stations to meet retail demand which is currently less than lackluster.
However, amidst low numbers, BP’s share price still remains stable which provides energy stock investors with a sliver of hope. There’s no doubt that a weak oil industry will be prolonged well into the next quarter but there are still signs that encourage investors to remain confident in BP’s stock.
Cost-Cutting Initiative
BP’s stock price shows that the proof is in the pudding. Investors continue to remain confident in the soundness of the firm regardless of the less than spectacular oil prices. Many believe that even with pessimistic forecasts, oil still has another 40 years. Moreover, BP is committed to a zero-emission goal and is looking to diversify into more renewable energy sources.
In response to the low oil prices this year, the company announced an initiative to cut costs by $2.4 billion. This increased investor optimism all around as it would add value to BP’s already strong balance sheet that has a cash reserve of $21 billion (as of December 2019). This is more than what they need to cover a $10.4 billion debt. With brighter days ahead for BP’s bottom line, I’d say, it’s a stock worth buying.
New Signs of Normalcy
Oil prices are past their darkest days and many analysts predict the price will pick up in the upcoming months. On Friday, crude oil prices finished higher and lifted U.S benchmark prices by 25%. This is the result of a slow but rising demand for oil.
Many countries across the globe have hit their peak of Covid-19 cases and are now seeing a gradual decrease in their numbers. Countries like Italy, that was once a pandemic hot zone, opened businesses earlier this month. As the world reaches some degree of normalcy, we see a positive reflection on oil prices. This is tandem with a sharp decrease in the supply of crude oil from nations like Saudi Arabia as regulated by the governing body OPEC. The country cut production by 3.3 million barrels and increased its export prices.
With the notion that things will eventually go back to normal, BP’s stock proves to be a sound investment for the long-haul.
A High Dividend Yield
Oil giant, Shell, recently announced a 66% cut in their dividends in an effort to increase their viability. The news came as surprise to many industry experts who believe other companies will follow suit but BP is yet to announce a cut in their dividends as well. Until the company decides to mimic the actions of their competitor (if ever), it is still worth taking advantage of the high dividend yield BP has to offer. Currently trending at 10.39% payout, the yield is especially attractive to passive income earners.
While BP’s financial performance will take a hit from the pandemic, a look at their dividend history over the last twenty years shows that a payment has been every single year (although there have been dividend cuts). So, even if we’re looking at the possibility of a dividend cut in the near future, BP’s yield is still likely to be higher than those of other FTSE 100 companies.
The Bottom Line on BP Stock
BP stock price may have a correlation to the price of oil but the coronavirus pandemic has shown otherwise. Currently, oil prices are not high enough to justify buying energy stock but BP might be the diamond in the rough. With cost-cutting measures in place, the promise of better days ahead and a high dividend yield, BP is likely to survive this price dip and provide investors with long-term benefits.
As of this writing, Divya Prem did not hold a position in any of the aforementioned securities.
