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Does the BP share price make the stock a bargain or a value trap?

Kevin Godbold
·3-min read
Silhouette of an oil rig
Silhouette of an oil rig

Several decades ago, wise old investors were fond of declaring, “Never sell Shell!” One reason for that was the pleasing alliteration in the phrase. Another reason was that many saw it as decent investment advice.

But that was back in the days when oil was a growth industry. And those owning shares in expanding companies such as Royal Dutch Shell and BP (LSE: BP) couldn’t put a foot wrong by simply buying and holding for years.

The BP share price reflects cyclicality

Things are rather different for big oil these days. And one of the main weaknesses of the buy-and-hold message is the way big oil companies have revealed their vulnerability to the inherent cyclicality of the industry. For example, since the beginning of the century, we’ve seen wild swings up and down for the share prices of both companies. And the overall progress of the stocks has been essentially sideways for 20 years.

And the industry is now in long-term decline. We need to look no further for evidence than both firms’ woeful recent records of shareholder dividend payments. After being flat for years, dividends look set to decline going forward. I reckon we can read a lot about a company by studying the directors’ decisions regarding dividends. And in the cases of Shell and BP, I don’t like what I’m seeing.

In fact, many of BP’s numbers are horrible. There’s way too much debt, for a start. On top of that, revenue and earnings look like they’re in a general downtrend. And the world is accelerating its efforts to decarbonise economies – which is bad news for companies dealing in fossil fuels for a living.

However, BP has seen the writing on the wall and is investing in renewables businesses. Operations such as energy storage, power generation and charging stations feature in the company’s updates now alongside the traditional oil and gas business news. And BP reckons it aims to become “carbon net zero” by 2050.

A long way to travel

But the company has a long way to go because those new business lines represent a fraction of revenue at the moment. So, in the short and medium terms, it looks like BP’s overall trading outcome will be affected by oil prices and demand levels.

Whether the BP share price makes the stock a bargain or a value trap depends on the investment timeframe. If I wanted to invest in renewable energy businesses for their growth potential I’d prefer one that stands alone. I suspect BP could see its progress with renewables neutralised by being shackled to its declining legacy oil business. So as a long-term investment, I reckon BP could be a value trap.

But in the shorter term, we may see some recovery in the overall business as the world recovers from the coronavirus pandemic. That’s because oil remains the company’s dominant line of business for the time being. Meanwhile, with the share price near 289p, the forward-looking dividend yield for 2021 is just above 5%. Perhaps that level makes BP a shorter-term bargain.

The post Does the BP share price make the stock a bargain or a value trap? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any 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.

Motley Fool UK 2021