Many stocks associated with renewable energy and electric vehicles such as Tesla have done really well. As a result, they are trading at fairly high multiples. BP (LSE: BP) recently pivoted more into green energy by stating a commitment to invest substantially more in the sector over the next 10 years. One might think the oil giant would benefit from the pivot with a potential bounce.
Alas, however, the oil giant’s stock hasn’t rallied, despite the green commitment, and its stock is near yearly lows.
In terms of the near-term stock price, why has the market given the ‘cold shoulder’ to BP’s green strategy?
Here’s why I think the market hasn’t given BP the same credit it has to green stocks, and why I think there is nevertheless an opportunity.
It takes time for the market to buy into BP’s renewable energy pivot
While BP has stated a commitment to change its investment strategy, I think it takes time to change investor perception.
When most people hear ‘BP’, they still think ‘oil and gas’. So, they group BP stock in with other oil and gas companies that don’t necessarily have the same commitment to green energy.
Speaking of oil and gas, oil prices haven’t done well. The price of the commodity is still weak due to the pandemic and sluggish global macroeconomic factors. China’s economy has turned back to growth. But the current partial lockdowns in Europe have not helped with demand in the West.
I believe the fear that ‘it could get worse before it gets better’ during winter in terms of Covid-19 has hurt sentiment for oil prices too.
Nevertheless, I think the market will eventually buy more into BP’s green push as the company makes more progress in the field. I also think management continuing to mention the green pivot in investor presentations will help.
As it makes more progress in the field, I think the company’s valuation could benefit as a result.
The potential green tech I think could boost sentiment
In addition to changing perception via investor presentations, I think BP making progress in green tech R&D and market share could also eventually benefit the company’s valuation.
There are many green techs, and BP has committed to investing substantially in solar, wind, bioenergy, hydrogen, and carbon capture. But I think most important is what the company does as it relates to fusion.
Given its safe and transformative potential, fusion will be a huge market that will revolutionise electricity generation when it arrives, in my view. According to recent studies made public by MIT-associated scientists, the technology could be commercial ready as early as the 2030s.
There’s a lack of fusion-focused investments in the public market at present. I think it’s likely that investors will bid up the valuation of any integrated oil company that invests heavily in fusion and emphasises the technology to investors.