Via Allen Brooks
“Physical and economic realities are not only considered, but controlled. Desire and hope for change is not a successful business strategy, and the past few years have awakened BP management to that fact.”
“Rely on” is a phrase BP plc CEO Bernard Looney likes to use to describe how his company makes the energy transition. According to Looney, BP is transforming from an “international oil company” to an “international energy company”. This means more renewable energy and less oil and gas. Looney invoked the “tilt” in February 2020 when he set new strategic targets for BP to achieve “zero net carbon emissions on an absolute basis by 2050 or earlier.”
Plan
In Looney’s presentation, “Renew energy, regenerate HA,” he says BP needs to reinvent itself as a clean energy producer because climate change requires it. The company needs to be part of the solution and no longer part of the problem. Looney said it’s not just the public demanding such a change, but so are BP’s investors and employees. Some observers wonder if this is a failed remake of BP’s rebranding as Beyond Petroleum in the late 1990s.
Looney said his first day on the job as CEO when he saw the company’s offices surrounded by climate activists forced the company to close. For Looney, this demonstrates the urgency of a change of strategy. In his presentation, Looney only vaguely outlined key aspects of the new plan – less oil and gas and more investment in “growth engines” – while promising high costs. specifically in the fall. At the same time, he warned BP investors and pensioners that dividend growth could be at risk due to lower returns on investments in renewables, but their more stable returns would counter cyclicality of oil and gas profits.
As Looney was saying in mid-February 2020, the pandemic has only just emerged and begun to spread across the globe. Economic lockdown drugs to fight Covid have almost destroyed the oil and gas industry, making BP’s new business plan a possible winner. Since then, global economies have reopened and recovered. With the recovery came more oil and gas consumption. Last year, additional oil and gas stimulus came from Russia’s invasion of Ukraine, which upended world energy markets and provided the impetus for Europe to end its dependence on cheap fossil fuels. cheap Russian. Prices for oil, gas, coal and electricity soar across the continent and in the UK Suddenly, energy security becomes a top concern, dispelling concerns about affordability and decarbonisation. carbon.
Walk back to the plan
BP recently released its 2022 earnings — record results like every Big Oil competitor. Overshadowing BP’s earnings announcements and dividend hikes are Looney’s revisions to his earlier grand “reinvent” strategy. In 2020, the management plans to liquidate oil and gas assets, reduce investment in petroleum business, accelerate investment in GTE and cut oil production in the future. The foundation of the new plans is to reduce oil production by 40% from 2019 levels by 2030. The plan is in stark contrast to the company’s previous goal of increasing oil production by 20% over the period. 2018 and 2030.
When BP reported its earnings on February 7, management announced major adjustments to its plan to “reinvent BP.” BP now plans to reduce production by about 12% by 2025 from 2019 adjusted production and by 25% by 2030 instead of the planned 40% cut. More oil and gas means more carbon emissions, further lowering BP’s 2020 expectations.
BP also plans to increase its capital investment program, adding $8 billion for each of its oil, gas and growth forward engine (GTE) businesses. The additional investment will be financed by significantly higher expected cash flows in part from higher oil prices. BP now sees real oil prices in 2030 at $70 per barrel, up from its previous estimate of $60. The higher oil price forecast means earnings before interest, depreciation and amortization (EBITDA) will add $4 billion to $6 billion by 2030.
By increasing capital investment, BP expects its GTEs to generate an additional $1 billion in EBITDA in 2025 and $2 billion in 2030. $8 billion in increased capital commitment to oil and gas will add $2 billion to EBITDA by 2025 and $3-4 billion by 2030. Note that petroleum’s return on investment is higher than its GTE. That’s the core of BP’s energy conversion problem.
Low profit from renewable energy
At the recent presentation of “BP’s Energy Outlook”, an audience member asked: With oil and gas profits in the 15-20% range and renewables at 6-8%, will Can returns later be raised or do investors need to lower their expectations? A panel that includes BP’s chief economist, the head of the International Renewable Energy Agency and the head of Columbia University’s energy program did not have an answer. The question was answered when BP announced its earnings – slowing the rush to renewables while sharing the spoils of higher oil prices through higher dividends and share buybacks.
A week before the BP release, UK-based Shell plc reported record earnings while also tweaking its green energy transition plan. So now, both BP and Shell have decided to slow down and reorient their efforts towards renewables. At the same time, they have increased their commitments to their traditional oil and gas businesses, which have consistently delivered higher profits.
Low returns from renewable energy are known. So well known that BP’s Looney has warned of potential risks to the company’s dividend growth and share price from accelerating investments in renewable energy. He pledged to protect the dividend, which was later cut as a result of the financial consequences of the economic disruption caused by Covid-19.
BP’s share price has lagged behind its American rivals since 2005 when an oil refinery accident claimed the lives of 15 workers and left the company on the defensive. That accident was followed five years later by the explosion of the Macondo oil well in the Gulf of Mexico, causing the largest oil spill in US history and jeopardizing BP’s future.
What’s more remarkable, however, is BP’s stock performance since the industry crash in early 2020. Since then, ExxonMobil’s stock price has quadrupled while BP’s stock has only doubled. . Shell and French oil company TotalEnergies SE. posted similarly poorly. Such results tell us that investors are less impressed with the strategic response to climate change by European-based oil giants, which is hurting profits. investor profits. Until European oil companies develop an answer to the low returns of renewables, investors will vote with their feet.
Conclusion
During Bloomberg TV’s London business show on the day of BP’s earnings announcement, the presenter asked: Do you buy BP shaft? Buying pivots could question whether investors think BP is serious about shifting away from GTE and moving to oil and gas to meet investor demand. If so, investors interested in Environmental, Social and Governance issues will avoid the stock. Or should investors buy BP stock because future returns will improve based on the pivot strategy?
BP’s share price rose 8% on earnings day and 3.4% the following day. Investors were “buying pivots” because they saw better capital management and greater earnings and dividends in the future.
The lesson of Big Oil’s latest earnings and business strategy adjustments is that relying on an “energy transition” means going much slower – or even switching back to energy-friendly sources. with consumers and taxpayers. Energy Affordability and Reliability from Energy Density tests the magic thinking about renewable energy.
Physical and economic realities must not only be considered but also controlled. Desire and hope for change is not a successful business strategy, and the past few years have awakened BP management to that fact.
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