With the share price at around 299p, oil giant BP (LSE: BP) is below the 18-year low around 305p it hit in 2010. Back then, it took the oil-spill disaster in the Gulf of Mexico to sink the stock. This time, it’s the Covid-19 pandemic and the collapse of demand for oil. Is BP now an unmissable bargain share?
Why BP could be a brilliant bargain share
Yesterday’s half-year results report contained some dire figures. But the prominent one for me related to the directors’ decision on the shareholder dividend. They cut the second-quarter dividend in half compared to the previous quarter. And that’s to be the new normal. BP has reset the ongoing quarterly dividend to 5.25 cents per share per quarter.
There’s no sugaring the pill. The directors’ decisions about dividends in any company speak volumes about their views on current trading and the outlook. By that measure, things are probably around half as good as they used to be for BP. The company faces a new set of challenges. And the main one is that the oil business isn’t as lucrative as it once was. The future is uncertain and BP wants to change course.
Chief executive Bernard Looney explained in the report the poor trading results were caused by a challenging quarter and the “deliberate steps” being taken to “reimagine energy and reinvent BP”. Looking ahead though, the company plans to return at least 60% of surplus cash to shareholders through share buybacks. But that will only happen after the balance sheet has been “deleveraged”.
I reckon the resetting of the dividend is a good base for the company to build its plans upon. I’m tempted to buy some of the shares now to hold as BP executes its transformation plans in the years ahead.
Exciting plans to transform the business
In a separate announcement yesterday, BP explained it aims to reshape its business. The plan is to transition from being an international oil company to an integrated energy one, focused on delivering solutions for customers. This is big news. In a world pushing for low-carbon energy solutions, it seems that BP sees the writing on the wall for its traditional oil business.
The firm has set out its vision saying it aims to increase annual low-carbon investment 10-fold to around $5bn a year “within 10 years”. The plan is to invest in renewables, bioenergy, hydrogen and Carbon Capture, Utilisation & Storage (CCUS). By 2030, BP aims to have developed around 50GW of net renewable generating capacity. And that works out at a 20-fold increase from 2019.
The directors reckon ‘ oil & gas production will reduce over that 10-year period by around 40% from the level achieved in 2019. By then, they expect the remaining hydrocarbon portfolio to be more cost and carbon “resilient”. To me, this is exciting change to look forward to. And I’d buy some of the shares now and hold for the ride. While I’m waiting, with the shares at 299p, the ongoing dividend is yielding just over 5%.