As a long-term investor, I often ask myself where I think a stock will be in 10 years. Historically, the BP (LSE:BP) share price hasn’t had the most remarkable run, as I’ve previously explored. But can management change all that moving forward? Let’s explore the bull and bear case for this business and whether I should be considering it for my portfolio.
The bullish view on BP’s share price
Today, BP is still very much a business that generates its income through the extraction, refinement, and sale of oil. That’s not exactly great news for the environment. But the recent surge in oil prices has turned the company into what CEO Bernard Looney, calls a “cash machine”. And it’s a key trait I like to see when evaluating long-term performance capabilities.
As extracting oil from the ground is largely a fixed-cost operation, the rising prices have worked wonders on BP’s profit margins. And consequently, analyst forecasts are estimating net income for 2021 will come in at $12.5bn (£9.23bn) versus $4bn (£2.9bn) in 2019.
What’s more, with the world slowly shifting away from its reliance on fossil fuels, BP has been aggressively investing in a renewable energy portfolio. The plan is to transition the business into a 50GW green energy powerhouse, with 40% of its oil & gas portfolio eliminated by 2030. That’s enough to power roughly 15m homes or around 60% of all UK households.
This is quite an exciting proposal. And if successful, it could send the BP share price to new heights.
Taking a step back
As compelling as BP’s future potential might be. I have some reservations. While the cost of installing and maintaining renewable energy technology is falling each year, the profit margins remain relatively tight compared to oil. Even more so when oil prices are trading above $80 a barrel. In other words, while revenues could surge, profits could actually suffer in the long term because of these increased costs.
But the short and medium-term performance of BP’s margins is also at risk. Like I said before, oil companies have fixed operational costs. That places them at the mercy of fluctuating oil prices, which could take a tumble before BP can complete its transition. Besides profits taking a hit, this may also disrupt management’s strategy. Why? Because the plan is to dispose of oil assets to cover the costs of going green. But if the price of oil drops, these assets will undoubtedly lose a significant chunk of value. Needless to say, that would be bad news for BP’s share price.
The bottom line
All things considered, I remain cautiously optimistic about this firm’s future. There is no shortage of challenges for management to overcome. But suppose the company can fulfil its green energy ambitions. In that case, the BP share price could be trading at a much higher valuation by 2030. Therefore, I am tempted to add some shares to my portfolio today.
Zaven Boyrazian has no position in any of the shares 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.
