The BP share price is falling: here’s what I’d do right now

BP’s share price is falling, but Roland Head reckons the shares could make a profitable addition to his dividend portfolio.

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2020 was a grim year for oil and gas producers like BP (LSE: BP). The pandemic caused a slump in demand that left the company facing a $5.7bn annual loss — its first for 10 years. Today’s results have left BP’s share price trending lower, but I’m not too concerned.

2021 is expected to bring a gradual recovery in oil and gas demand. With BP shares now offering a dividend yield of 6%, I’m considering whether to buy these shares for my income portfolio.

There was some good news

BP’s 2020 results weren’t all bad. The group returned to profitability during the final quarter of the year, albeit a tiny $115m. I was also relieved to see net debt fell from $45.5bn to $39bn last year. Although borrowings are still a little too high for my liking, I’m happy to see this number moving in the right direction.

There was also some early good news on the company’s transformation into “an integrated energy” business. BP’s renewable generating capacity rose by 25% to 3.3GW last year and the company has added further capacity in January.

Plans to raise $25bn by selling unwanted assets are said to be on track. A few days ago, the group inked a $2.6bn deal to sell a 20% stake in a gas field in Oman.

Although CEO Bernard Looney still has a lot to prove, I’m confident BP’s newish boss is making progress.

Why I’m tempted by the BP share price

BP also says sales of road fuel fell by 14% last year, while aviation fuel was down 50%. Covid-19 caused delays to several of the group’s major projects. January wasn’t great either. Fuel retail sales fell by 20%, compared to the same period last year.

Without a recovery in demand for oil and gas, BP could struggle to rebuild its profits and achieve its targets for cutting investing in renewables while cutting debt. There’s also a second risk. Even if BP’s performance recovers, the market may continue to award the stock a low rating due to concerns about the environmental impact of fossil fuels.

However, none of this is a secret. The BP share price has fallen by more than 40% over the last year as markets have priced in an uncertain future:

I expect to see a strong recovery in demand for road and aviation fuels as the Covid-19 pandemic starts to ease. I don’t know when this might happen, but my guess is during the second half of this year.

City analysts covering BP shares appear to have a similar view. The latest consensus forecasts suggest the group could generate a $6.2bn profit in 2021. These forecasts put BP shares on a 2021 price/earnings ratio of 12, with a dividend yield of 6.1%.

I’d be happy to buy BP shares for my portfolio at this level, as I believe we’re probably at a low point in the market cycle for oil and gas.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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