Integrated energy giant BP (NYSE:BP) has a huge 5.8% dividend yield and is making big plans to shift its business with the times. On the surface, that sounds like pretty good news all around. But there's more to understand here when you dig into the details a little bit. Here are some key facts to consider before you put BP stock on your buy list.

1. A dividend hit (again)

BP, formerly known as British Petroleum, doesn't have the best track record when it comes to dividends. Roughly a decade ago it was involved in a major oil spill in the Gulf of Mexico. The company changed its name following that event and the financial impact forced it to sell assets (effectively repositioning its business) and cut its dividend. It was a difficult time for the company and its shareholders.

Historically low energy prices in 2020, caused partially by the impact of COVID-19-related economic shutdowns, have pushed BP's bottom line deep into the red. With the anti-carbon zeitgeist today, the company decided to cut its dividend by 50% and embark more aggressively in a new direction (more on this in a second). The cash saved from cutting the dividend will be used to help fund the shift in its business. Except dividend-focused investors have had to, once again, suffer through a dividend cut as BP changes gears. If you are trying to live off of the income your portfolio generates, BP has proven for a second time that you can't really put much faith in its quarterly dividend check.

Oil rig with pipe and two workers shown prominently.

Image source: Getty Images.

2. The future is complicated

The big new direction at BP, meanwhile, sounds pretty much like a complete corporate overhaul. The company is talking about changing from an integrated oil company to an integrated energy company via investing in clean energy and electricity assets. That's not particularly different from what some of its European peers are doing; Royal Dutch Shell and Total (NYSE:TOT) have both been investing in electricity assets, too. Shell, for reference, has also chosen to cut its dividend at this point. But what BP is talking about is pretty massive.   

For example, by 2030 it expects to reduce its oil production by a huge 40%. Meanwhile, management intends to put as much as 40% of its capital spending each year into non-oil investments. This may be the right choice, but only time will tell. The problem for investors is that BP is basically jumping in with both feet. If this move turns out to be a strategic misstep, it's not going to be easy to fix.   

3. What about that balance sheet?

Part of the problem facing BP today has little to do with oil. The company is one of the more leveraged names in the integrated energy peer group. This limits its flexibility to maneuver in the face of adversity. To put a number on that, BP's debt-to-equity ratio has spiked to 1.1 during the current energy downturn. That's higher than any of its closest peers and over four times higher than Chevron (NYSE:CVX). Although European energy companies tend to hold more debt and more cash than U.S. peers, BP's leverage is extremely high. 

BP Debt to Equity Ratio Chart

BP Debt to Equity Ratio data by YCharts.

Mending the balance sheet is another one of its key goals today, along with completely reshaping the company. The dividend cut is meant to help trim debt, too, by the way. When you step back, there's a lot going on here and it's all happening at the same time. 

4. Not a great track record

While you are considering everything that has to go right for BP to get its financial house in order while it is simultaneously looking to change the foundation of its business, you might want to look at how well it's cared for shareholder capital in the past. It's not a great picture when you look at key industry metric return on capital employed (ROCE). As the chart below shows, for the past decade, BP's ROCE has been at or near the bottom of its peer group. 

BP Return on Capital Employed Chart

BP Return on Capital Employed data by YCharts.

To be fair, the oil industry is tough today. But that decade includes a point when oil prices were well over $100 per barrel. While the company's ROCE was much higher in then than it is in today's low-oil-price environment, it was still an industry laggard on this metric. That's something to keep in mind when you consider the massive scale of the strategic shift BP is undertaking today. 

Is BP the way to go?

When you add it all up, BP doesn't look like a particularly great choice in the energy patch right now. For investors still looking for an oil play, conservatively financed Chevron is probably a better option. For investors that want to hedge their bets, Total is also working to shift toward clean energy and so far has managed to do so without cutting its dividend (in fact, Total stated in its second-quarter earnings conference call that the board believes it can sustain the current payment even with oil in the $40-a-barrel range). It's entirely possible that BP pulls off its big plans for change without a hitch. But most investors would probably be better off watching that transformation safely from the sidelines for now.