A 40% gain from BP (LSE: BP) shares in a month? From one of the FTSE 100‘s dullest companies? Nobody seems to think that’s out of the ordinary in 2020. What a weird year we’ve had. Anyway, that’s how far the BP share price has climbed since a low on 30 October.
Before I get too excited, it’s perspective time. The BP share price is still down 42% so far this year. That’s close to three times the FTSE 100’s drop of 15%. So how has one of the Footsie’s most respected stocks become a pariah in 2020?
We can ask the same of Royal Dutch Shell, whose shares are down by almost exactly the same amount. Both companies cut their dividends in 2020, for Shell the first time since the Second World War. And that shook the cobwebs off some of us old-timers.
Back in the oil price crash, BP CEO Bob Dudley famously promised he’d keep the dividend going. He also predicted the downturn could last a few years. He was right, the dividend survived, and I almost bought BP shares a number of times. Today, I’m glad I didn’t. But that was just good fortune rather than foresight on my part.
BP share price collapse
So what’s hitting the BP share price so hard this time? It’s a combination of factors. The Covid-19 pandemic is the most obvious, and it has badly hit oil demand. It’s not just individuals around the world curtailing their travels. No, so many businesses have had to cut down that industrial demand has slid too.
While we’ve been captivated by the immediate pandemic fallout, I suspect some of us have taken our eye off the oil price. In the early days of global lockdowns, the price of a barrel plunged to less than $20. It’s rebounded to around $45 now, but that’s still low compared to long-term levels.
So that’s a combination of a pandemic and a new oil price crisis. And if that wasn’t enough to send oil stocks plunging, ever-growing pressure on the use of hydrocarbon fuels has been accelerating. No wonder the BP share price is at its lowest for 25 years.
Low-carbon shock
In August, BP revealed its “New Strategy To Deliver Net Zero Ambition.” It aims for a tenfold increase in low-carbon investment by 2030, with a rise of up to eightfold by 2025. It includes a whole list of reductions in its traditional business. I’m sure that would have come as a blow at any time. But I think BP chose wisely to spring it on us at a time of other crises. When things are looking darkest, it can often be the best time to let slip an extra bit of scary news. So what does this all mean for the outlook?
I reckon we’re looking at two things here. The new BP and all that low-carbon stuff could be a challenging investment. But it still has the old BP and all the oily stuff to back it up while it happens. We’ll hopefully see a relatively painless transition. And even the reduced forecast dividend for 2021 would still yield 7% on today’s BP share price. I think that apparent good value is partly behind the recent gains. And once again, I’m tempted to buy.