The FTSE 100 crash has left the BP (LSE: BP) share price trading more than 50% lower than at the start of the year. The shares now offer a dividend yield of 15%. Although the oil price crash will have an obvious impact on the oil and gas giant, I’m not convinced things are really this bad.
Here, I want to explain why I think BP shares are likely to offer excellent value at current levels.
BP share price vs oil price
Let’s take a step back. The price of Brent Crude oil has fallen from over $65 to $26 per barrel so far this year (although this figure might be different by the time you read this).
At under $30, we can be pretty certain BP and most other oil producers are losing money on each barrel they sell. Comments made by finance boss Brian Gilvary earlier this year suggest the group needs an oil price in the mid-$50s to breakeven in 2020.
It’s not surprising the BP share price has crashed. But it’s worth remembering this is a £47bn global company that’s been in business since 1908. BP has survived price crashes, depressions and world wars.
I’m confident BP will survive and recover from the coronavirus crash. Indeed, news from the company suggests it should be a more profitable business from 2021 onwards.
Look at the bigger picture
BP’s breakeven oil price has been falling steadily since 2016, as new low-cost projects come on line. According to new CEO Bernard Looney, breakeven should fall to about $40 in 2021.
That’s a lot lower than the “mid-$50s” price expected this year. This should mean BP is much more profitable at lower oil prices next year.
It’s also important to remember BP doesn’t just sell oil and gas. As an integrated company, it also operates refineries and chemicals plants. These sell a wide range of fuels, as well as a wide range of industrial chemicals. The group’s downstream business generated an underlying profit of $6.5bn in 2019, compared to $4.9bn from oil and gas production.
We can’t be sure what’s going to happen next. Demand for all oil products could be lower if the global economy slows, as expected.
But with so many oil producers currently losing money, I don’t think oil will stay under $40 for very long. At some point, I think that heavily-indebted producers with high costs will be forced to cut production. It’s also possible the big producers who triggered the crash — Saudi Arabia and Russia — will get back together and agree to cut production. At this point, the BP share price could rebound quite quickly.
What would I do now?
We’ll get updated guidance from BP in April, when its first-quarter results are due. But I think there’s a reasonable chance the dividend will be left unchanged.
In the meantime, I think the BP share price look heavily oversold. If I didn’t already have plenty of exposure to oil, I would be buying this stock at under 300p. In my view, this is the right time for long-term investors to be brave and buy.