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I’d consider buying BP if these 2 things happen

Jay Yao
·3-min read
Oil pipes in an oil field
Oil pipes in an oil field

It’s amazing how things can quickly change.

Just a year ago, Tesla was worth around half of BP (LSE: BP). Now, the oil giant is worth a fraction of Tesla.

In addition to Covid-19 arguably hurting BP more than Tesla, I think Tesla’s success may have played a part in BP’s decline. Here’s my thinking. Because Tesla has executed pretty well so far, many investors are bullish on the company’s future execution. The market has given the company credit for future potential accomplishments many years in advance.

Given the huge market cap that the market has awarded Tesla, companies are investing more in EVs (electric vehicles). If companies continue to invest in EVs, their cost could decrease faster, resulting in more of them on the road. If there are more EVs on the road, demand for oil likely won’t be as strong.

As a result of potentially weaker demand for oil in the future, the market has become less optimistic on BP’s future. Due to those concerns and more, shares of the oil giant have fallen substantially.

While its stock has come under pressure, I’d consider buying BP if certain things were to occur:

Faster-than-expected global growth

I’d consider buying BP stock if the global economy grew substantially faster than expectations.

I think the global economy could rebound faster than expected if a variety of factors occurred, such as governments around the world doing a better than expected job in terms of manufacturing and distributing Covid-19 vaccines when they come out.

If the world economy grew faster than expected, I think there is potential for demand for oil to grow faster than expected too. Although EVs might get a lot of publicity, oil is still an essential transportation fuel given that most of the cars sold today consume oil. If economies around the world rebounded faster, travel could rebound faster and more oil could be consumed.

With oil a global commodity, I think any increase in widely followed oil prices could also help the company.

Given that BP doesn’t have as strong a balance sheet as some other oil giants, it could use as much new capital as it can get in its transition to renewables.

Although renewables are the future, the return on capital isn’t as high as in many oil projects.

BP does a good job communicating its plan for a green future

I would consider BP more if management were to do a good job in terms of communicating its green energy plans.

Given the fight against global warming, the oil giant’s management has made the tough decision to move more to renewables.

Considering that transitions can be difficult, I think the uncertainty around BP has increased, which is a headwind for the oil company. Along with the uncertainty, there is still execution risk.

If management does a good job in terms of communicating how it plans to adjust to a greener future, I think many investors will become more confident on management’s return on investment goals. If that were to occur, I think management could decrease uncertainty around the stock.

In that case, I think BP could become more attractive in many investor’s eyes and I’d consider buying the stock.

The post I’d consider buying BP if these 2 things happen 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 owns shares of and has recommended Tesla. 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