The Bear Case for BP Continues, Despite a Slight Recovery

The economic downturn caused by Covid-19 has had a crippling effect on the energy sector, with the global demand for oil slumping significantly this year. Hence, energy giants like BP (NYSE:BP) have suffered greatly. BP stock is now down 53% for the year.

the BP (BP) logo on a sign against a blue sky with clouds
Source: JuliusKielaitis /

This all comes at an especially inopportune time for the company. Currently, BP is looking to make a move towards clean energy. In an effort to evolve into an integrated energy entity — with investments in clean energy and electricity assets — BP recently cut its dividend by 50%. But that aggressive step in a new direction was incredibly risky, and has now been further complicated by the pandemic.

It will be interesting to see how things pan out for BP and its competitors in the coming months. So far, though, it seems like there is a rocky road ahead for the company.

BP Stock in the Third Quarter

In the third quarter, BP was able to eke out a minuscule profit, contrary to analyst estimates. Higher fuel sales effectively offset weak refining margins during the quarter. There’s also the possibility of returning oil demand in Asia, which has dealt with the novel coronavirus crisis much better than Europe and the United States. However, BP’s management warns that it could be a long time before there is substantial recovery.

That being said, earnings per share of 3 cents comfortably beat expectations of a loss of 9 cents per share. Additionally, revenues came in at a little over $44 billion. Yet revenues were down 35% on a year-over-year (YOY) basis. Upstream production was also down.

On the other hand, a significant positive for the company has been that its net debt dropped to $40.4 billion from $46.5 billion a year earlier. Historically, BP has had a rough time managing its debt load. After slashing its dividend back in August, the new reduction in net debt will help BP ensure investors of the sustainability of its dividends. Currently, BP stock’s dividend yield is 7.9%.

Tough Transition to Renewable Energy

BP has made its intentions clear this year, working towards an integrated energy model in the near future. It is worth noting, though, that the company has had a terrible time investing in clean energy projects in past, citing issues with margins. However, this time around, BP seems to be more committed, aiming to reduce its oil production by 40% by 2030.

Within the next 10 years, the company will be increasing its investments in renewable energy projects significantly. It also plans to work alongside 10 to 15 significant cities worldwide in order to achieve its zero carbon emissions plan. Such a dramatic shift in the company’s direction has had investor’s in BP stock worried about the future.

It’s tough to say how quick and effective the transition to clean energy will be in the long term. For one, fossil fuels remain significant in the world’s energy markets. On top of that, the returns so far from non-renewable energy projects are significantly higher than renewable energy projects. So, for a company like BP to go all-in on clean energy is an extremely risky move at this stage.

The company is also one of the most leveraged names in the energy sector. That further limits its ability to maneuver if it fails on these clean energy fronts. Given what we know about renewable energy presently, it will be near-impossible for BP to achieve similar margins to what its core business makes.

Bottom Line

BP’s third-quarter was relatively positive, considering the challenges the company faced in the preceding quarter. However, things remain dicey for BP stock, especially when it comes to the future.

With the pandemic, the plan to overhaul the business couldn’t have come at a more challenging time. Investors remain skeptical about these new green initiatives — and reasonably so — but they could also become a significant catalyst for BP’s growth.

So, considering the circumstances, it’s tough to invest in BP stock at this time. Existing shareholders should probably employ the wait-and-see approach, however, and hold onto their investments. BP just might make it through.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.


Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC