BP Stock Will Rise but There’s One Reason Not to Buy

Stocks to sell

Like almost all industries, oil and energy have suffered during the coronavirus pandemic. BP (NYSE:BP) has been subject to this downturn along with all of Big Oil. The double-whammy of the Russia-Saudi price war and oil demand bottoming out has dealt energy a proportionally larger blow than most industries. BP stock has suffered, but out of chaos comes a big buying opportunity.

BP Stock Will Rise but There's One Reason Not to Buy

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Many investors are now taking a serious look at scooping up cheap oil stocks to ride them forward as the economy rebounds. Thus, BP and the stocks of the other oil super majors — which have represented safety in volatile energy markets — are on the radars of many investors.

If you are looking to diversify into oil stocks while the opportunity is ripe, these stocks are a great place to begin your analysis. Let’s take a look at investment factors regarding BP.

One massive, if tentative, macroeconomic factor is turning in the right direction as economies are going to be opening up and demand for oil is going to rise. China, the first country to be hit with the coronavirus and the first to reopen, is providing a window onto demand for economies as they reopen amidst the pandemic.

Short-term worries will persist, but ultimately, consumers, countries, and the economies underpinning them are going to use oil at similar levels to those that existed prior to the pandemic. Alternative fuel sources will continue to challenge and garner attention, but oil is still king. All of that said, I’d stay away from stock in BP.

BP Stock Isn’t a Short-Term Investment

2020 has been a horror-show for oil and energy. There’s no need to rehash what happened in Saudi Arabia, Russia, and Cushing, Oklahoma. But the thrust of these problems is that there is a real opportunity to pick up oil stock at seriously low prices. 

It might seem like the entire year of 2020 has been terrible for all stocks. But the year began pretty normally. Let’s remember that the pandemic started about half-way through Q1. So Q1 earnings only included a fraction of the effect of the black swan events of the Saudi-Russia price war and coronavirus. We’re nearly half-way through Q2 (April 1 – June 30) and things are far from normal with analysts expecting that earnings reports are going to be worse in Q2 than Q1. BP’s stock price should stay low for a while, but demand will recover in the coming years. That’s where BP will earn money for investors who choose to invest soon or hold on.

BP’s Green Aspirations

Recently, Bernard Looney, an employee of BP since 1991 was promoted to the role of CEO. Looney looks like the right guy to lead the company. But it remains to be seen if he can lead BP higher. 

Under Looney, BP declared a goal of being zero-carbon by 2050. This is in keeping with European contemporaries Shell (NYSE:RDS.A ) and Repsol. To some investors this is a worrisome bellwether. However, there’s no need to worry that BP will stop drilling for oil any time soon: Not only is 2050 nearly 30 years away, but also Looney cut his teeth in drilling and exploration. While he says all of the right things for an oil executive in 2020, he remains just that – an oil executive. Point being, it seems likely that his goals won’t deviate BP too far from its roots. Zero-carbon plans are more likely to take the form of carbon offsetting initiatives than reductions in drilling. 

BP Debt Bleeds Value From Investors

BP has a debt level above its target range. BP’s long-term debt has risen from $23.8 Billion to $64.02 Billion in the last decade. This is a trend in the wrong direction for investors. During the same time period, shareholder equity has shrunken from $104.98 billion to $90.48 billion. This equates to a debt-equity ratio that has risen from 0.23 to a current 0.71. Another way of looking at this is to say that if you purchase a dollar of stock in BP, 71 cents of that $1 is owed to someone else. Chevron (NYSE:CVX) has a debt-equity ratio of 0.16, ExxonMobil’s (NYSE:XOM) is 0.17, and Shell’s is 0.43. BP management can and will try to explain away such unfavorable ratios. But the fact remains that equity investors don’t want their stock to be overleveraged by debt.

Further, no company wants to allocate excessive amounts of revenue to the servicing of debt. Debt levels pull BP stock down. The less debt that exists, the more money that can be given back to investors in the form of dividends, and the more money that can be reinvested into productive assets. And during this pandemic, they’ve added significantly more debt.

Dividends Investors Still May Consider Buying BP

BP has been seen as a solid and reliable investment. An investment in its stock can be used as an income source through dividend payouts. But following Shell’s decision to cut its dividend recently, investors were nervous that other oil supermajors were at risk of following suit. Fortunately, BP will maintain its dividend which should serve to draw in some dividend seekers. Although BP will pay its upcoming dividend, I would caution owners to be wary. Shell decreased their dividend by two-thirds with a lower debt-to-equity ratio than BP. I wouldn’t bet on future BP dividends being full if the economy doesn’t start to turn around soon. For more info, InvestorPlace strategist William Roth recently posted an excellent analysis of 4 dividend Energy Stocks at Risk.

If you’re currently a BP stock holder, it is a company with enough cash that you don’t need to worry any time soon. I’d simply hold it. I wouldn’t buy it though because its debt levels are just too high. As an investor, you want cash returning value to you and not used to pay down BP’s high debt. 

As of this writing, Alex Sirois did not own any of the securities mentioned above.

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