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BP stock: why I think it’s a buy for the long term

Jay Yao
·3-min read
Silhouette of an oil rig
Silhouette of an oil rig

Things aren’t going well for BP (LSE: BP) stock right now. The company just said as part of its annual outlook that oil demand might have peaked

Shares of the oil giant are near multi-year lows as the coronavirus outbreak has really hurt the oil mega-giant.

China also recently committed to going carbon-neutral by 2060, meaning potentially more electric vehicles on the road sooner than expected. The more electric vehicles, the fewer oil-consuming ones.

Nevertheless, I think the bad news is priced in and although the company faces a number of headwinds, BP stock still has value.

BP has a profitable downstream unit, for example. For the second quarter of 2020, this reported underlying cost profit before interest and taxes of $1.4bn, in line with the same metric for the second quarter of 2019.

Going forward, the unit could still be attractive. Even if oil demand declines, the world will still need refined products that BP makes.

The downstream unit isn’t the only segment that’s profitable. BP also has a pretty lucrative oil trading business that has had a solid track record of helping the company increase its return on average capital employed.

Besides downstream and its trading operations, I think there are other reasons to like shares of the oil giant. Here are two of them…

A successful renewable energy push

I think the firm making a big renewable energy investment could help BP stock.

Although renewable energy hasn’t been its core focus, the company has been in the renewable energy industry for a while. Due to its experience, it has some competency.

If management executes in renewable energy, BP stock could do well given how big the market will be.

BP has some advantages over many of its renewable energy competitors and given its existing scale, it can do larger deals that might be more attractive.

If the market sees the company making meaningful progress in the sector, it could improve sentiment around BP stock.

Longer term, its renewable energy push could make its earnings more sustainable.

Faster-than-expected economic recovery

In the short term, I think a faster than economic recovery could help BP stock.

To combat the Covid-19 outbreak, governments around the world have unleashed massive amounts of fiscal and monetary stimulus. The stimulus, along with pent-up demand, could translate into robust economic growth in 2021.

There’s reason to think that the world economy could improve faster than expected. China’s economy, for example, has recovered faster than expectations with GDP for the second quarter beating many analyst estimates.

If the world economy recovers faster than expectations, oil demand could rise faster than estimates too and that could boost BP stock.

The faster BP recovers in the short term financially, the more money it will have to invest in renewable energy in the long run.

The post BP stock: why I think it’s a buy for the long term appeared first on The Motley Fool UK.

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Jay Yao 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