The year 2020 has not been a good year for the oil industry. , the international benchmark, started the year around $ 60. At the end of April, it was below $ 20. As several lockdowns eased in the early summer, oil prices soared to hit their six-month high. A run-up to the USD 50 level seemed likely.
Still, September has questioned the industry's future for the rest of the year, as well as price weakness. While Brent is still above $ 40, many analysts agree that a drop to $ 35 cannot be ruled out.
According to the Organization of the Petroleum Exporting Countries (OPEC), in September:
“The forecast of global economic growth is revised down to -4.1% for 2020 from -4.0% in the previous month, amid further slowing momentum in emerging and emerging economies in particular. .. In 2020, the global demand for oil has declined further down by 0.4 (million barrels per day). "
Earlier we looked at how investors (ETFs) might use to participate in oil price movements. Today we extend the discussion to UK-based oil company BP (LON :), (NYSE :).
At the beginning of the year, both BP and Royal Dutch Shell (LON :), (NYSE 🙂 had the largest market capitalization on the UK's largest stock index. But their fall from grace has been swift and furious. Each company's stock is now trading at less than half of their former market capitalization. On September 29, BP stock closed at 229.30p ($ 17.67 for US stocks).
Likewise, the index has fallen about 46%. US-based oil companies Chevron (NYSE 🙂 and Exxon Mobil (NYSE 🙂 are also down 41% and 51% respectively.
Dow Jones Oil & Gas 1-Year Chart.
As an aside, biopharmaceutical giants and COVID-19 vaccine precursors AstraZeneca PLC (LON :), (NYSE 🙂 and GlaxoSmithKline (LON :), (NYSE 🙂 currently hold the leading position on the FTSE 100.
Let's look at BP to see if a contrarian bet might be appropriate.
Dismal Quarterly Results
The short-term fortune of BP shareholders has always been closely linked to price. of oil. Higher oil prices help increase revenues, cash flows and profits. In early August, BP in London, UK, reported poor results, with a loss of $ 16.8 billion, compared to a profit of $ 1.8 billion in Q2 2019.
The company also halved its dividend. Although the cut was expected, it still weighed on investor sentiment. In 2010, BP had done away with dividends to pay for the oil spill at the time. Subsequently, to the delight of long-term shareholders, it became a consistent dividend payer, with regularly higher payouts. With the recent dividend cut, management admitted to being uncertain about future earnings.
In recent quarters, the company has diversified its portfolio and expanded its alternative energy products, including renewable fuels and power. Yet BP is still known as a "super-sized" oil.
CEO Bernard Looney has made it clear, however, that he is at the helm of making it a more integrated energy company. Over the decade, management plans to cut the company's oil and gas production by 40%. Instead, the group will invest more resources in electricity generation and clean energy.
Earlier in September, BP released its "Energy Outlook 2020". One of the most important messages was:
"The structure of energy demand is likely to change over time: declining role of fossil fuels offset by an increasing share of renewable energy and a growing role for electricity. These changes support core beliefs about how the structure of energy demand can change. "
In other words, BP believes now is the time to look at alternative energy sources. Renewable energy players are likely to be richly rewarded.
Bottom Line
We would argue that many investors have a love-hate relationship with energy, especially oil companies. At the beginning of the last quarter of the year, the oil industry is again confronted with increasing supply and lower demand. In the event of a slow global economic recovery, oil prices could return to the $ 30 level or even lower. Then BP shares could suffer further.
So far, BP is down more than 50% in 2020. The forward P / E and P / S ratios are 21.65 and 0.27. In the short term, we would not be buyers of the shares yet, while a decline of 5% -7% is on the way. Market participants who are not currently shareholders of BP may consider waiting on the sidelines for the next few weeks. They may also want to analyze the next quarterly results while management is charting a new course.
We wouldn't be in favor of bottom picking. In the long run, however, we see value in holding an oil company and consider buying the price drops. Industry figures or BP's quarterly statistics may not look good. Yet the company's history dates back to 1909. So it is likely that it will weather the current storm like many others that passed in the last century.
