President-elect Joseph Biden’s objective of net-zero carbon status for the U.S. by 2050 might seem like a lose-lose situation for older energy companies. However, this could turn out to be a win-win for BP (NYSE:BP), and hesitant BP stock traders might find reasons to flip bullish.
Indeed, I’ll grant that a bullish argument can be made in favor of buying BP stock today. In the interest of fairness, I will reveal a prominent analyst’s upgrade for BP stock, as well as the company’s not-completely-horrendous quarterly fiscal results.
Still hovering close to multi-decade lows, BP stock presents a dilemma for value hunters. Is the stock a bona fide bargain, or a proverbial falling knife?
Only time will tell as there are many moving parts to this complex story. In the final analysis, we might find that a radical shift in BP’s business strategy is too strong a pill for traditional energy investors to swallow.
A Closer Look at BP Stock
Even the most ambitious optimists can’t deny that BP stock is in a prolonged bear market. In early November, traders can purchase shares at prices not seen since 1994.
We can play the blame game and point to depressed petroleum prices and the onset of the novel coronavirus. At some point, however, we have to admit that the price action in BP stock is profoundly discouraging.
Also unsettling is the fact that BP stock’s trailing 12-month earnings per share is -$6.42. That’s pretty awful for a stock that’s trading at around $15 or $16.
There is one bright spot that ought to be mentioned, however. BP stock offers a forward annual dividend yield of around 8%. Hence, at least the shareholders can collect some distributions along the way. Perhaps this could provide a buffer against future share-price losses.
Not Completely Terrible
Overall, BP’s third-quarter fiscal results weren’t anything to write home about. Still, they weren’t entirely awful, either.
The company reported adjusted earnings of 3 cents per share on a replacement cost basis, excluding non-operating items. That certainly beat the analyst community’s projection of a loss of 9 cents per share.
Yet, this result also indicates a steep decline from BP’s year-ago quarter earnings of 66 cents per share. So, it’s up to you to decide whether the glass is half-empty or half-full.
Moreover, BP’s total quarterly revenues of $44.202 billion were substantially below the $69.292 billion recorded during the year-ago quarter. The third-quarter revenues also fell short of Wall Street’s estimate of $60.017 billion.
On the flip side, we can congratulate the BP bulls for getting a prominent big-bank analyst on their side, sort of. Specifically, Morgan Stanley analysts upgraded BP stock from “underweight” to “equal-weight.” That’s not necessarily an effusive endorsement, but at least it’s a step in the right direction.
‘Biden’ Your Time
I’ve already shown you some red flags that might steer you away from BP stock. The most important reason to bide your time and await further developments, however, has to do with a radical change in BP’s business strategy.
BP, it seems, is pivoting away from the traditional fossil fuels business. Believe it or not, over the next 10 years, BP intends to reduce its oil production by 40%.
It’s a bold plan, to say the least. I suspect that some folks who’ve owned BP shares for years or decades aren’t necessarily pleased that the energy giant they bought a stake in will effectively be a completely different company.
BP CEO Bernard Looney has announced a plan involving investments of $5 billion per year in renewables. Will this costly plan pay off for BP and its shareholders? And, will Biden’s clean-energy initiatives get blockaded by a gridlocked Congress?
I don’t claim to know the answers, so I’m staying on the sidelines when it comes to BP stock. Declaring my ignorance is, as usual, the smartest thing I can do right now.
The Bottom Line
If ignorance is bliss, then I’m the most blissful financial writer around. With the future of the energy market unclear to me, I’m choosing to sit on the sidelines. Bolder BP stock traders, meanwhile, are free to take a position in the company’s costly bet on renewables, if they dare.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.