OPINION: Some investors may be anxious, but BP chief executive Bernard Looney sounds confident that the UK supermajor will eventually demonstrate that earning returns of 8% to 10% on its investments in renewables and lower carbon energy is not “dreamlike”.
For many, the jury is still out on BP's promise to achieve the kind of profits it needs to keep investors happy while pursuing a low carbon strategy.
The share price is down about 60% since the start of the year.
While this is in large part due to lower oil and gas prices, and falling demand due to the pandemic, doubts about BP's radical shift towards renewables that Looney outlined in August are also a factor.
“Clearly, we've done some homework and are confident in our ability to deliver that 8% to 10%,” breezed Looney on a call with analysts to discuss third-quarter results this week.
“We wouldn't have said it otherwise.”
Looney pointed out that the Lightsource BP solar venture has already delivered returns of 8% to 10% — described by him as the “key value metric” — from about 17 projects.
“Over time our intention is to give you more visibility and transparency... so that you can start to have the confidence that these returns are not dreamlike,” Looney told the analysts.
Looney took charge of BP in February and has since launched a radical new strategy to transform the 110-year-old oil and gas giant into an "integrated energy company", with a pledge to boost annual spending on low-carbon energy tenfold to $5 billion by 2030.
BP intends to build significant scale in renewables and bio-energy, as well as seeking early positions in carbon capture and hydrogen, which Looney reckons has a good chance of being a material part of business in the years after 2030.
BP is aiming to develop 50 gigawatts of renewable energy generating capacity by 2030, a 20-fold increase on current capabilities.
In August, BP cut its dividend for the first time in 10 years — slashing it in half to 5.25 cents — a move designed to underpin its new stricter capital structure.
BP’s workforce has also been reduced by about 2800 so far during 2020, with a total reduction of about 10,000 positions expected by the end of this year.
A major part of BP’s plan is to reduce oil and gas production by about 40% — equal to about 1 million barrels of oil equivalent per day — from 2019 levels of about 2.6 million boepd.
It has also promised not to enter new countries to explore for oil and gas.
However, the company has made no secret of the fact that a "high-graded" oil and gas portfolio will play a major role in underpinning cash flows and earnings for some time to come.
It was, therefore, interesting to note the prominence of upstream business in Looney’s results presentation, which he hailed as BP’s “engine room” that will power earnings growth out to 2025 and key to fulfilling BP’s new slogan — “performing while transforming”.
Looney may be confident that BP can perform while it transforms, but were his comments deliberately designed to reassure investors worried about the pace of transformation taking place?
As analysts at RBC Capital Markets pointed out: “Right now, the energy transition is dominating debates. However, BP and others will remain hydrocarbon businesses for the foreseeable future.”
(This is an Upstream opinion article.)