Should I add BP stock to my portfolio today?

Silhouette of an oil rig

Oil prices sank to just $16 per barrel during March 2020. As a consequence, BP stock tanked almost 50%, falling from 450p in February to just 250p a month later. Up 12% year-on-year, the current BP share price is 294p. Oil prices have been steadily rising, recently touching $70 per barrel. So why hasn’t BP stock been climbing at the same rate?

BP stock challenges

The pandemic slashed demand for oil. With worldwide travel bans enforced, the price of oil tumbled. Consequently, BP posted a $5.7bn loss for the year, compared to a $10bn profit the year before. This plunged BP stock to a 26-year low and forced the firm to slash over 10,000 jobs. BP Chief Executive, Bernard Looney described 2020 as “the most brutal I can remember in almost 30 years in this industry”. And the pandemic is far from over. Virus variants could mean new restrictions, something continually plaguing the travel industry in the past 18 months. Moving forward this could also place a lid on the growth of BP stock.

A longer-term challenge that BP must overcome is the shift to green energy. It has committed itself to net zero emissions by 2050, which means slashing oil and gas production. It plans to increase its renewable energy portfolio from the current 3.2GW to 50GW by 2030. Although BP could pull this off, I think it will be a tough switch for the firm. Susannah Streeter, a Senior Analyst at Hargreaves Lansdown, described this switch as “walking on a tightrope for the business”.

However, BP is reportedly making good progress towards the target of the sale of $25bn worth of assets by 2025. A $5bn divestment is expected this year. This is helping the firm reduce its net debt position by 20% while moving towards a green energy future. Bolstering the balance sheet and going green should help BP stock in the future

Moving forward

Although the pandemic hit it hard, there have still been some positives for BP. The reduction in the workforce led to its highest margin in 10 years. In addition to this, as my fellow Fool Roland Head pointed out, BP earnings are forecast at $10.5bn for 2021. That would make this the most profitable year since 2013.

BP is currently trading on a forward price-to-earnings (P/E) ratio of 7.5x with a healthy dividend yield of 5.4%.  Competitors ExxonMobil and Valero Energy are currently trading with P/E ratios of 11x and 13.3x respectively. This shows me that BP stock currently offers good value compared to its competition. The large dividend yield also makes BP stock a great income option for me, I believe.

Overall, I think BP stock could be a good addition to my portfolio. Only time will tell if the firm can make the switch to green energy, but I think that current value and encouraging revenue projections for 2021 outweigh this risk.

The post Should I add BP stock to my portfolio today? appeared first on The Motley Fool UK.

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Dylan Hood 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.

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