BP (LSE: BP) shares certainly appear cheap at the moment. They have bounced back from the 222p low seen at the depths of the Covid-19 market crash. But, for a share that traded at 600p a few years ago, a current price of 280p per share represents a big discount.
There are, however, good reasons for the cheap-looking BP share price. Covid-19 was the catalyst. Stock markets around the world crashed, economies shut down and oil prices collapsed. BP was not alone in cutting its dividend to keep cash in the business. So it is not surprising that BP shares had a price slump. Yet economies around the world are getting back towards normal, and oil prices have recovered somewhat. So why do BP shares, after a brief bounce, seem to be heading lower again? Something else is going on.
A change in climate
Facing a pandemic has brought into focus the other big looming threat to humanity: climate change. Calls for action on climate change are not new, but Covid-19 seems to have kicked things into a higher gear. Big asset managers are dumping oil, mining and petrochemical stocks. Enhanced environmental, social and governance disclosures in the financial reports of public companies are being demanded.
BP shares might be lagging because the firm is still viewed as a steadfast oil major. However, the company has been making noise since before the crisis about its increasingly green credentials. I actually bought shares in BP in January this year, because it appeared to be committed to a transition to an alternative energy future.
BP shares green plans
In February this year, BP revealed its plan to be net-zero for carbon emissions by 2050 at the company level. Earlier this month the plan got a lot more ambitious. Before, BP was not including the fuel it sells to customers to burn in the zero-balance. Now it will. BP will be a very different company in the future if the plan is carried out successfully. The sale in June of a petrochemical asset for $5bn will provide cash for the transition, and $25bn of further divestments are planned by 2025. Cutting the dividend, which was announced with the new green deal, will also free up funds to put the plan into action.
Wind farms and a large stake in a solar business have featured on BP’s balance sheet for some time. Before anyone had heard the name Covid-19, BP had was making investments in low-carbon, alternative and energy efficiency businesses. So, I cannot agree with anyone calling BP’s move a completely cynical knee jerk reaction to the current climate. But it would be fair to say it helped accelerate a trend already underway in BP’s business model.
Maybe BP shares are lagging because investors do not have faith the company can change from an oil business to an integrated energy company. I disagree and would argue we need oil majors to make these changes. A renewable future will still need big energy projects to meet the needs of a growing population. BP has the experience to make this happen.
BP and its shareholders did well from the old energy business. I think both can do well from the new one, so I am definitely not selling my shares.