It’s been a grueling year for shareholders of BP (NYSE:BP). The price of the shares has plunged from $39 to $16, bringing the market capitalization to nearly $55 billion. The price of BP stock has not been at these levels since the mid-1990s, when the oil market was in a glut.
But, of course, BP stock is not alone. The other mega oil operators like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) have also seen massive drops in their stock prices.
The main reason, of course, is the impact of the Covid-19 pandemic. It has resulted in steep drops in demand for oil.
While the Organization of the Petroleum Exporting Countries (OPEC) has been successful in reducing supply, it has not been enough. The price of crude is still at levels where it is challenging for oil companies to generate a profit.
Given all this, it is reasonable for investors to be bearish on the sector. But then again, isn’t this when a contrarian approach could perhaps be profitable? I actually think the answer is yes. True, you will probably need some patience. But it could be well worth the wait.
So let’s take a look at some of the positives of BP stock.
Restructuring Is On Track
Even before the pandemic hit, BP had been pursuing a major restructuring. Keep in mind that this helped with the results of the latest quarter. The company reported a profit of $86 million. BP was also able to get the debt load down to $40.4 billion, compared to $46.5 billion in the same period a year ago.
Yet BP is not done with the restructuring. The company has announced plans to reduce their global workforce by 10,000 jobs. Next, there will continue to be aggressive moves to unload assets. The goal is to reach $25 billion in sales by 2025.
Oh, and yes, in August the company cut its dividend in half, which will be key in bolstering the balance sheet.
Sentiment and Valuation for BP Stock
The sentiment for BP stock is downright awful. It seems that much of the bad news is already factored in. Just look at Wall Street analysts. The consensus price target for BP stock is $28 a share, which assumes 75% upside from current levels.
Let’s face it, as there continues to be reductions in oil supply as well as improvements in the global economy, there will be a return of strong profits for BP. There will also be more leverage because of the cost reductions and lower debt. Note that the company plans to start up share buybacks when the debt load gets below $35 billion.
In the meantime, the dividend yield is quite attractive. It is currently at 7.8%, even with the big cut in the payout.
A Transformative Pivot
One of the big risks for BP stock is the potential existential threat to fossil fuels. But the company definitely understands this and is taking bold actions to adapt. The goal is to achieve net zero emissions by 2050.
Yes, this is a stretch. It will be a major challenge to transition to alternative energy sources. Yet BP has some inherent advantages. The company has a global infrastructure for distribution, logistics and marketing of energy that would be difficult to replicate. Another advantage is that the company will have considerable resources reduces investments on traditional projects. The goal is to — in 10 years — invest $5 billion annually in these new sources and achieve 50GW (gigawatts) net renewable energy generating capacity.
This will not be easy. But the key is that BP is serious about making a change — and this is likely to be a long-term positive for the company.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.