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The BP share price is in free-fall! This is what I’d do now

Rupert Hargreaves
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The BP (LSE: BP) share price has slumped in 2020. It started the year trading around 500p. It’s now down to 330p — that’s a decline of 34% in just a few months.

For some perspective of how severe this decline is, in 2008, as the financial crisis was starting to erupt, the share price only declined by 20%. When one of the company’s oil wells in the Gulf of Mexico exploded back in 2010, the stock declined 42% in a few days.

Looking at these numbers, it seems as if investors believe BP is currently facing a worse situation than it was back in 2008, but the company’s outlook is better than it was after the Gulf of Mexico disaster.

Of course, the BP share price doesn’t tell us that much about the underlying company’s fundamentals. These are what investors should be concentrating on in the current environment.

Will the BP share price continue to fall?

Investors are dumping the BP share price for two reasons. Firstly, Saudi Arabia’s decision to increase its oil output has hammered the price of the black gold. All oil producers are being hurt by this decision. Secondly, the coronavirus outbreak will hit global economic growth, and that will lead to reduced oil demand.

Therefore, BP is facing both demand and supply issues. It’s a perfect storm for the company.

Management faced a similar problem back in 2014/2015 when the US shale oil boom flooded the market with cheap oil and gas. BP survived this battle, and it is well-positioned to pull through the current one as well.

Financial firepower

The BP share price is supported by the group’s integrated business model. Producing oil and gas is only part of the organisation’s operations.

Indeed, for 2019 as a whole, the company generated $11bn underlying profit before interest and tax from its upstream (oil production) operations. BP’s downstream (refining and marketing) businesses produced an underlying profit, before interest and tax, of $6.4bn.

The company’s downstream operations provided vital cash flow in the last oil price crash. They’ll do the same this time around. BP’s refining and petrochemical operations should actually benefit from lower oil prices, as it’ll reduce costs.

Unlike the vast majority of other oil and gas businesses, the BP share price is also supported by the group’s robust balance sheet. Net gearing was just 31.1% of the end of 2019. Further, the company has plenty of financial flexibility to mitigate the fallout of oil price crash by cutting capital expenditure.

Management was planning to spend $15bn on capital projects in 2020. Reducing this total while selling non-core assets can help the group manage these uncertain times.

Time to buy?

Considering all of the above, now could be an excellent time to snap up a share in this leading oil and gas producer. The BP share price is currently dealing at a price-to-earnings ratio of 8.3, which suggests the stock offers a margin of safety. It also supports a dividend yield of 9.8%.

Considering the strength of the group’s balance sheet, as well as its cash flow flexibility, it would appear this distribution is secure.

The post The BP share price is in free-fall! This is what I’d do now appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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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