The winds of change very much appear present at BP PLC (LON:BP), which Tuesday released quarterly results full of big details.
BP’s dividend undoubtedly makes most of the headlines, not least as it is the fiftieth cut in the FTSE 100.
It means that half the FTSE 100 constituents have cut or cancelled their payouts post pandemic, and, by value these measures represent a tally of some £22bn, or 57% of total FTSE 100 payouts.
But the strategy laid out by BP promises potentially much more tectonic changes for both the company and the broader hydrocarbon industry.
So what have investors learned from BP’s big strategy reveal?
A complete reimagining of the company, or maybe just a rebrand?
It remains to be seen how extensive BP’s intended new strategy and reimagining proves to be.
Nonetheless, BP today said it will transition from being an international oil company to become an integrated energy company – that’s a big statement of intent from one of the most recognisable names in the hydrocarbon business.
This move comes amidst unprecedented pressures and after Bernard Looney’s succession of 10-year chief executive Bob Dudley.
Unstoppable forces in the form of global petro-politics and severely reduced crude prices amid the COVID-19 pandemic has met the increasing hard-to-move ESG (environmental, social and governance) objectives.
Climate change and the anti-carbon campaign has gained significant momentum and influence in recent times – with major investor groups now maintaining strong positions, and even forcing divestment and carbon-free prerequisites.
On one hand is it getting harder to negotiate the PR of running a big, public hydrocarbons business, and, at the same time, the market economics of the oil business mean that some amount of diversification is very much needed.
Brutally bad financials, but no worse than expected
Financial results for the second quarter saw BP report a US$16.8bn loss, including US$10.9bn of impairments, amidst collapsed crude oil prices and low demand during the pandemic.
The oil major reported an underlying replacement cost loss of US$6.7bn versus a US$2.8bn profit in the same period a year before. BP’s write-offs come as a result of new oil price forecasts and expectations, very weak refining margins and low demand for fuels and lubricants.
Strong performance amid the volatility helped BP’s trading division provide some offset to the losses.
Net debt stood at US$40.9bn at the end of the second quarter, down US$10bn from the end of the first. During the period, BP issued US$11.9bn of hybrid-bonds and realised US$1.1bn of divestments.
Dividend ‘reset’ not cut
Evidently, investors won’t need to think a great deal about dividend policy for quite some time as BP fairly decisively set new expectations today.
Not so much lower for longer, rather lower forever.
As it changes tack, re-imagines and reinvests towards a ‘zero-carbon’ future one the first typical ‘Big Oil’ characteristics to be shrugged off is the dividend policy. Most often than not, oil majors act as almost utility-like stalwarts to a share portfolio. Oil spill trauma aside they are predictable, cash-generating, dependable sources of income payments.
Today, however, BP cut in half its usual quarterly payment and said it was a reset.
The new 5.25 cents per share per quarter dividend is described as a “resilient level” and said it will remain fixed there.
Management, meanwhile, promised to return at least 60% of surplus cash to shareholders through share buybacks once the group’s balance sheet has been deleveraged, and subject to the group retaining a strong investment grade credit rating.
What will the new BP be like?
The finer details are somewhat masked with a slightly broad comment that it would invest in low carbon technologies, including renewables, bioenergy and early positions in hydrogen and CCUS (Carbon capture, utilisation and storage).
Whichever form it comes in, renewable generation capacity will certainly be part of the mix.
BP specifically says it will in the next ten years increase its capacity some 20-fold from its current level of around 2.5 gigawatts to 50GW. At the same time, it aims to take a 10% share of the hydrogen market and wants to increase bioenergy output to 100,000 barrels a day from 22,000.
It intends to build ‘energy partnerships’ with between ten to fifteen cities where it targets the installation of 70,000 electric vehicle charging points, from around 7,500 presently.
In the hydrocarbons business, BP said it will cut oil and gas volumes by more than 40% over the next ten years. There will no new exploration in new countries and, operationally, the company plans to reduce its emissions by 30 to 35%.
The company said its investment strategy, which will comprise US$5bn per year, will create sustainable value via low carbon and non-oil and gas opportunities.
It targets profitable growth, aiming for 7-9% annual growth in earnings per share.