BP (NYSE:BP) has released a litany of bad news, including dividend cuts, massive operating losses, and a controversial change in its business strategy going forward. The oil and gas giant recently reached its lowest point in more than 25 years. Investors in BP stock have gotten drilled.
With all that in mind, understandably, many investors are giving up. Why not take the year-end tax loss and put the funds back into something that isn’t on such a massive losing streak?
Before you throw in the towel on BP stock, here are a few redeeming factors to consider.
First, BP just announced its Q3 results on Tuesday. These were a huge improvement from Q2.
You may remember that last quarter, BP lost a massive sum of money. For Q3, however, BP actually managed to eke out a small profit. That topped expectations of another quarterly loss. While the business remains weak overall, there were pockets of strength in some areas such as fuel marketing that helped the company get back on track.
There’s a lot more here than just a modest upturn in near-term earnings however. What’s really going to drive BP stock is that management is making fundamental changes to the business.
Changing Business Model and BP Stock
Back in the day, BP used to be called British Petroleum. For awhile, this led to the tagline “Beyond Petroleum” as the company sought to seize the climate change high ground early. This new strategic direction fell flat, however, after the Deepwater Horizon disaster caused BP unbelievable harm as a brand and company.
Now, however, a decade later, it appears BP is finally ready to make Beyond Petroleum a reality. The company has announced an ambitious effort to become a zero net emissions firm by the year 2050.
This is pretty incredible when you stop and think about it; a long-time oil and gas company is planning to stop emitting carbon into the atmosphere. So is BP going extinct? Not so fast.
Instead, BP plans to invest heavily in sustainable energy as well. It is focusing on green energy production, such as via wind farms. It will also invest heavily in convenience stores, charging stations, and other pieces of the logistics that get fuel and electricity to consumers.
Conversely, BP will greatly throttle back investments in traditional oil and gas. With sufficient green energy creation, on balance, BP intends to get to a point of having no net negative effect on carbon emissions or climate change.
Will it work? We simply don’t know. An oil and gas major of BP’s size has never managed this sort of transition before. However, let’s be clear in saying that BP’s existing business plan certainly hasn’t been working in recent years. It may well be worth the shot of doing something daring like this ahead of its other energy company rivals.
The Dividend Cut
While BP has made plenty of news recently, its decision to slash the dividend has generated the most headlines. Investors have long owned the energy majors for safe reliable dividend streams. And, at least until 2015 or so, they delivered on that promise.
Since then, however, prolonged low oil prices have forced painful decisions across the industry.
BP joined in that trend in August. At that point, it cut the dividend in half, with a new payout of $1.26 per share per year. This was a crushing blow for retirees and income investors who rely on BP for dividends.
The good news, however, is that in the context of BP’s depressed share price, this is actually still a generous yield. For people investing in BP stock today, the newly-trimmed dividend still offers an 8% yield. That’s cold comfort for long-time shareholders, but it’s a juicy offer for people that have confidence in BP’s new business direction.
Furthermore, with the cash it saves, BP has a reasonable plan. It first intends to shore up its balance sheet and maintain a strong investment grade rating. Once that mission is complete, BP will begin a large share repurchase program. Given that BP stock was at $45 in prior years, gobbling up shares down here under $20 each could offer tremendous value on the company’s capital.
BP Stock Verdict
It’s going to be a long road to recovery for BP. Particularly with the company adapting to a new business model, this will not be an overnight comeback.
However, management has taken the right steps. It admitted that the old course wasn’t working and has made big moves such as the dividend cut and changes in investments going forward to chart a new direction. This won’t fix everything for BP immediately. But with the stock at its lowest level since the mid-1990s, you don’t need much to go right from here for shares to rally.
On the date of publication, Ian Bezek held a long position in BP stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.