BP (NYSE:BP) wants to reinvent itself as a renewable energy company. But it’s still valued as an oil and gas outfit. That means it’s not highly valued at all.
BP stock fell with the pandemic and never got back up. It traded below the March pandemic low of $16 as recently as late October. Shares closed on Dec. 18 at $21.74, a market cap of $74.7 billion. In 2019 BP had revenues of about $294 billion. That should drop by about one-third this year but the stock is still worth just one-third its revenue.
The fall in 2020 has made BP stock a moderate buy recently, with analysts at Tipranks predicting a return to $30 a share. But that depends on the business BP doesn’t want to be in anymore.
BP Stock as It Pivots From Oil
BP has signed a wind power agreement that will supply electricity to Amazon (NASDAQ:AMZN) cloud data centers. It owns half of Lightsource, a solar power developer. It’s pumping carbon dioxide back under the North Sea to reduce greenhouse gases.
BP announced its low carbon pivot at its August annual meeting. This helped distract analysts from its dividend cut and a $16.8 billion quarterly loss. CEO Bernard Looney said the company will now invest $5 billion a year in renewables. Its current capital budget is $12 billion. He said the company will not explore for oil in any new countries, that it will cut production by 40% over 10 years and reduce refining by a third.
Since then, BP has sold its Alaska oil pipelines. It has bought half of Equinor’s (NYSE:EQNR) interest in two large wind projects off New York and New England. It plans to invest in both “blue hydrogen,” derived from natural gas, and in “green hydrogen,” derived from electricity created by solar farms and wind turbines.
Yet, Still an Oil Play
Despite these big ambitions, BP is still an oil and gas company. It eked out a small profit in the September quarter, announcing a dividend of 5.25 cents a share. That’s a tiny fraction of the 63 cents a share it paid in February.
Still, the stock price rose because oil demand and prices were increasing. West Texas Intermediate (WTI), the primary U.S. grade, has climbed to $48 a barrel from $42. BP stock is up 42% since late October, when the earnings came out.
BP operates the world’s third-largest oil field, in Iraq, plus fields in Oman and the United Arab Emirates. It promised not to explore in any new countries, but it’s still doing it in places where it has done it before. It just finished a pipeline from Azerbaijan that will add to Europe’s glut of natural gas supply.
Critics say that despite BP’s grand talk, its renewable pivot is no more ambitious than incoming President Joe Biden’s own energy plan. In short, it’s not out of step.
The BP Bottom Line
That means investors must depend on capital gains for growth. At least in the near term, those gains will be completely dependent on the price of oil and gas.
BP’s investment in renewables comes on top of investments it must make to keep oil and gas flowing. Despite the company’s rhetoric and plans, it will remain dependent for profits on those oil investments.
Here’s an analogy I’ve used before: BP is like International Business Machines (NYSE:IBM), milking profits from one business, promising to enter another. However, savvy investors will value it for what it is, not what it’s promising to become.
At the time of publication, Dana Blankenhorn had a long position in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.