The BP (LSE: BP) share price has fallen a staggering 40% so far this year, excluding dividends. Investor sentiment towards the oil major has crumbled as the outlook for the global economy has darkened over the past six months. The coronavirus crisis has caused oil demand around the world to plunge. The price of oil has followed suit.
However, after this decline, the BP share price appears cheap. As such, long-term investors might benefit from buying the company.
BP share price value
A few weeks ago, BP made a stunning admission. The company declared that it believes the price of oil will average $55 a barrel in the long run. That was a $20 decline from its previous forecast.
Alongside this admission, BP announced that its production assets were worth nearly $18bn less than they were at the beginning of 2020 due to the lower oil price target. This revelation had a significant impact on the BP share price, and it may continue to weigh on investor sentiment for some time to come.
BP now has to make some hard choices. Oil demand has slumped this year, and the world is moving away from oil and gas as fuel sources. Renewable energy is cheaper and easier to produce. What’s more, many countries are planning to invest billions in renewable energy as part of their coronavirus recovery plans.
BP itself is also looking to become a net-zero emissions company by 2050. It has yet to lay out how it will reach this target.
Considering all of the above, the outlook for the BP share price in the near term seems uncertain. Nevertheless, as a long-term investment, the company may be an attractive investment at current levels.
Gearing up for growth
BP has plenty of capital to fund its push towards net-zero. It recently raised $12bn from investors. This could be enough to cover group capital spending for a year. The company also has the potential to earn a net profit of $5bn next year, according to the City. These funds could be used to hit the green energy target.
Unfortunately, this could spell the end of the market-beating 9% dividend yield on the BP share price. While this may be bad news for income seekers, by reinvesting profits back into its operations, the firm may be able to expand its bottom line. That could lead to high capital returns for investors.
And with the stock trading 40% below the level at which it began the year, it looks as if the BP share price offers a margin of safety at current levels. If the company returns to growth, investor sentiment may improve, which could push the stock up.
Therefore, while the near-term outlook for the business is uncertain, BP seems to have the financial flexibility to meet its net-zero goal by 2050, which could herald a new era for the company.
The post BP’s share price is down 40% in 2020. Is now the time to buy? appeared first on The Motley Fool UK.
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Rupert Hargreaves 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.
Motley Fool UK 2020