The BP Share Price is Rising: Here’s What You Need to Know

It’s finally happened.BP(LSE: BP) has slashed its dividend, cutting the payment by 50%. As I discussed in June, this cut was overdue and shouldn’t be excessive of a surprise. However, what might shock you is that the BP share price has increased by around 7% following this news.

Why are investors cheering this jumbo-sized dividend cut? In other words, it’s due to the fact that BP boss Bernard Looney has set out a clear and definitive strategy to decarbonize its business, while still supplying decent go back to shareholders.

Goodbye oil, hi renewables

Mr. Looney prepares to transform BP from an oil and gas company into an ” integrated energy business”. He’s planning big changes over the next ten years. It’s not easy to know how these might impact BP’s share cost.

By 2030, oil and gas production will have fallen by 40%. The company will no longer perform any exploration for oil and gas in nations where it does not already operate.

With this, BP strategies to increase spending on low-carbon energy to around $5bn per year by 2030, consisting of financial investments in wind, solar and hydrogen. It’s hoped that this financial investment will support the development of 50GW of eco-friendly generating capacity.

BP’s aim is to broaden the consumer-facing side of its company by partnering with ” 10-15 cities and 3 core markets”. The firm hopes that client interactions will double to 20m per day by 2030.

Will these changes make cash for shareholders?

Make no mistake. I believe these changes will see BP’s service gradually shrink over the next ten years or two. Even if BP is successful in developing its eco-friendly energy supply organisation, renewables do not normally supply such high returns as oil and gas developments.

However, these modifications don’t suggest that BP’s share rate will not increase.

You see, the company plans to pay a set dividend but will use ” a minimum of 60% of surplus money” to fund share buybacks. Presuming there suffices surplus money, what this need to imply is that BP’s share capital shrinks quickly enough to raise the company’s annual earnings per share.

Management is targeting 7% to 9% annual development in adjusted money profits per share over the next 5 years. I ‘d think this should be quite an easy target to hit if it’s measured from 2020 onwards, offered the effect of Covid-19 and the oil cost crash.

BP share price: purchase, sell or hold?

This year has been extremely hard for BP, which reported an underlying loss of nearly $6bn for the six months to 30 June. However, big energy businesses run on extremely long timespan. One bad year isn’t the completion of the world.

Should long-lasting investors be purchasing stock at this level? I approximate that the company’s decreased dividend will offer a yield of 5.4% at the last-seen BP share cost of 300p. That’s attractive enough, I expect but bear in mind that the business doesn’t plan to increase this payment.

Looking at other measures of valuation, my amounts show that BP shares are trading at a small premium to their book value, with a price/earnings ratio of about 14 times 2021 forecast profits.

Overall, I ‘d state that BP shares look relatively valued to me, offered the challenges facing the company. I ‘d continue to hold BP after today’s news, however, I would not rush to purchase more.

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