Oil and gas producer BP (LSE: BP) was one of the most hated shares of 2020. Even after recent gains, BP’s share price is still down by nearly 40% on a year ago.
It’s been a tough time for investors in the FTSE 100 giant, made worse by last year’s dividend cut. But that’s all in the past now and I believe BP shares are likely to rise this year. Indeed, if I didn’t already own enough oil stocks, I might consider buying BP now.
The world still needs oil
Coronavirus hit oil consumption in a way that’s rarely been seen before. Airlines were grounded and people drove their cars much less than usual. The BP share price hit a 25-year low.
At the same time as all this was happening, the world suddenly got more concerned about climate change. Shares in electric vehicle companies soared last year. Traditional manufacturers suffered.
However, the reality is that the vast majority of cars on the road are still powered by fossil fuels. Freight transport is almost totally dependent on oil.
When the world starts to return to normal and we can fly and travel again, I think we’ll see oil demand improve. I expect BP to be a winner during this period — City forecasts suggest the group’s pre-tax profit will rise from $9bn in 2021 to more than $14bn in 2022.
A net zero future?
BP boss Bernard Looney doesn’t expect the golden age of oil and gas to last forever. Since taking charge in February 2020, Looney has tuned into a programme of sweeping changes at BP, aimed at reaching net zero by 2050.
Oil and gas production will fall by 40% by 2030, as a result of selling assets or decommissioning them. There will be no exploration in new countries. And the company will reduce the amount of capital that’s tied up in its oil and gas business.
Meanwhile, BP aims increase spending on low-carbon energy 10-fold by 2030. The company hopes to have 50GW of renewable generating capacity by that time. To put that into context, UK utility SSE has 3.9GW of renewable capacity today.
BP share price: why I’d buy
It’s too soon to know whether BP can deliver on these promises. Some investors will suggest these commitments are just greenwashing — an effort to disguise the group’s ongoing investment in oil and gas.
Personally, I think we’ve reached a tipping point. Companies like BP can’t just shut down oil production tomorrow. The firm’s responsibilities to its lenders, shareholders and host governments would make this impossible. But I do believe BP is serious about finding a middle way forward.
That’s one reason why I’d buy this stock today — BP has a global brand, plus energy trading and engineering skills I think will remain valuable.
The other reason why I’d buy today is I think BP’s share price will rise long before we find out the truth about the group’s plan to go green.
At around 300p, the shares look cheap to me in historic terms. BP’s revised dividend should provide a reliable 5% yield. Meanwhile, the company’s commitment to use spare cash to buy back shares could mean earnings per share rise even if profits are flat.
Over the next few years, I think BP shares should outperform the market.