Last week, BP (LSE: BP) was the most bought stock on Hargreaves Lansdown’s investment platform. This suggests many UK investors expect its share price to rebound in 2021.
I think BP shares have the potential to move higher from their current levels. After all, they’re still about 40% below their 2020 highs. That said, I think the share price recovery could be more drawn out than some investors expect. Here are three reasons why.
BP shares: a recovery could be slow
The first reason I expect BP’s recovery to be slow is that demand for oil looks set to remain weak in the near term.
Just yesterday, the International Energy Agency (IEA) said global oil demand will be lower than forecast this year due to the surge in new coronavirus cases and restrictions on global travel. It has cut demand forecasts for the first quarter of 2021 by 600,000 barrels per day. It’s also trimmed its projections for the year by 300,000 barrels per day.
“It will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales,” the IEA said.
Lower oil demand is bad news for BP’s share price. That translates to lower oil prices which, in turn, translate to lower profits for BP.
Institutions are avoiding oil and gas
Another issue that concerns me about BP shares is that sustainability has become a massive focus for institutional investment managers over the last few years. As a result, many large pension funds and asset managers are now completely avoiding the oil and gas sector. This could impact demand for BP shares and, subsequently, affect the share price going forward.
Of course, BP did announce a major renewable energy transformation programme last year. Its aim is to be a global leader in the clean energy space and be a ‘net zero’ business by 2050, or earlier. However, right now, it’s still very much an oil and gas business.
BP’s dividend is not secure
Finally, looking ahead, I think BP shares are likely to be less attractive to income investors (both private and institutional) than they were in the recent past.
BP has been a popular dividend stock in the low interest rate environment due to its high yield. However, last year, the company slashed its dividend significantly, reducing its quarterly payout from 10.5 cents per share to 5.25 cents per quarter in August.
This cut may scare off some income investors due to the fact that often, after a company has cut its dividend payout once, it makes another cut soon after. With BP carrying a huge amount of debt on its balance sheet, the dividend certainly isn’t guaranteed.
Less demand for the stock from income investors could hamper BP’s share price recovery.
BP shares: my move now
Given these issues, I think there are better Covid-19-recovery plays than BP right now. So, I’m not going to buy the stock. I believe BP’s share price recovery could be slow and drawn out.
