In the spring, British multinational oil and gas giant BP PLC (NYSE:BP) was teetering. Walloped by an oil price war, slammed by a precipitous drop in demand thanks to the novel coronavirus pandemic, then caught up in a stock market crash, BP stock fell off a cliff.
After a brief post-crash bounce, BP shares continued to slide through the spring, summer, and fall. By the end of October, they dropped lower than at the worst of the March market crash. However, in the past several weeks, BP stock has begun to move the other direction.
Is it time to rethink this stock? It’s put together a 23% gain since closing at $14.90 on October 28 — its lowest level since 1995. A coronavirus vaccine is imminent, bringing the possibility of a return to normal. Is now the time to snap up BP shares in anticipation of a recovery?
Some investment analysts think so, but I’m not convinced. BP itself is wary of a future for fossil fuels and that doesn’t exactly fill me with optimism in the company as an investment opportunity.
Why Did BP Stock Begin to Climb at the End of October?
Multiple factors combined to kick off a rally in BP stock that began after it hit that record low on October 28.
Several days before, the company reported third quarter earnings and beat expectations with a small $100 million profit. That was far more palatable than the $6.7 billion loss for Q2. It brought hope that the worst is over.
In addition, the company announced a new green hydrogen project for the North Sea. The news of a coronavirus vaccine nearing production also stoked hopes of workers returning to commuting and travel resuming — with a corresponding rise in oil demand.
Lower Oil and Gas Demand Likely to be the New Normal
The coronavirus pandemic gutted world oil and gas demand, along with prices. With employees working from home, cars remained in driveways. Planes were grounded. As a result, in April fleets of oil tankers were anchored offshore with nowhere to unload tens of millions of barrels of unwanted oil.
Demand began to recover through the year, but 2020 has been a year of reckoning for oil and gas companies. Reduced demand — from a combination of idled vehicles and the growing popularity of electric cars — will be the new normal. BP itself says 2019 was likely the year of peak oil demand.
The company is projecting a decline in fossil fuel demand over the next 30 years. The recognition that its products face decades of declining demand is not exactly good news for BP stock investors.
BP Wants to Transform to a Net Zero-Carbon Company
To its credit, BP has read the tea leaves and sees fossil fuels as a dead end. In February, the company announced a plan to become carbon neutral by 2050. In addition, it promised to boost investment in alternative energy ventures. That includes ongoing spending on wind farm and solar power installations. Investment in alternate energy would be boosted from the current level of $500 million annually to $5 billion annually by the end of this decade.
A lot is riding on BP’s strategy. What are the odds the oil company can actually pull this off? Bruce Usher is a business professor at Columbia University’s business school. He told the Washington Post:
The challenge as I see it is that it is almost impossible for incumbent companies to change their business models … I can’t think of a company like that in the energy business.
Bottom Line on BP Stock
Like many oil and gas stocks, BP gets an “F” rating in Portfolio Grader. There have simply been too many warning signs to ignore in 2020, from the company writing down $17.5 billion in assets, to being downgraded to the point where it’s near junk status, to slashing its dividend.
There are investment analysts who like what they see in this company. Those tracked by CNN Money have BP rated as a buy with a median $24.55 price target.
I have to break ranks with the pack. If you already own BP shares, holding onto them certainly seems like the smart strategy. But buying BP stock now? That’s a different story. Despite its ambitious plan to transform into a net-zero-carbon company, I just don’t see BP returning to meaningful growth.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system —with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.