BP has begun outlining the details of how it will move from one of the world's oldest oil and gas companies to a low – carbon giant. Now it must get investors to buy in.
Judging by the share price, things are not going well.
In the afternoon trade, British energy policy increased on Monday by 1.16% in London. It is just above a 25-year low, and the stock is down more than 50% since the beginning of the year.
The company's main competitors – European energy companies such as Royal Dutch Shell, Norges Equinor and France's Total – meet all hits on their stock this year, when the pandemic beat energy needs and set oil prices at times in free fall. These three are also in the midst of laying out their strategies for hitting net zero emissions by 2050, a transformative new notion of what an older oil and gas company could be. It is one that has so far been largely limited to European companies. American giants such as Exxon Mobil are largely committed to doubling down on traditional oil and gas.
Speaking to Fortune in June, BP's CEO Bernard Looney spoke about the scale of the shift, noting that "trillions of dollars will be used to connect and replace the world's energy system," he said. he. [1
It is also a great challenge.
When Looney announced the company's 2050 target shortly after he became CEO, he claimed that a company that has built its legacy on fossil fuels could fundamentally transform in a matter of years, quickly disposing of oil assets while acquiring and develops infrastructure-heavy renewable projects —And while earning investors.
The company said it expects to provide 8-10% returns for investors – lower than for large ticket oil projects, but still a hefty promise. While the industry's promises have been hailed by many, the lack of detail has also given valid, cautious skepticism.
Reminiscent of "outside petroleum"
When Looney announced his commitment to the net zero target, many longtime energy investors could be forgiven for winning. After all, the company has been here before: in the late 1990s, the company underwent a high-profile rebranding to "outside petroleum", and committed to renewable projects. Either poorly judged or simply ahead of their time, the transition was a resounding flop. Many of the investments acquired during the company's renewable consumption were quietly rejected within a few years.
Then there is the current attempt. In the summer, Looney beat a "slimmer" BP, announcing about $ 18 billion in write-downs, cutting 10,000 jobs and halving the company's dividends. While it was set as part of the transition, the major slimming was seen as much on the lens of oil prices as crashed, as it was a company in the midst of a major overhaul.
That everything fed into the skepticism that greeted BP as it laid out the details of the transition in September, in a series of day-long presentations.
"We believe BP's starting point for its 'reinvention' remains difficult," Bank of America analysts said in a note. They pointed to an "overworked" balance sheet, with a debt burden that was about 10% higher than its European peers, and a smaller existing low-carbon project base than the same companies, especially Total, that went into the transformation.
Although the target is 2050, the company will also have to move very fast. By 2030, BP plans to cut oil and gas production by 40%, and expand the capacity for renewable energy to 50 GW by 2030 – up from just 2.5 GW in 2019 – much of what comes from a development project for solar energy.
There is also the question of what to pay for the transition. There, analysts reported concerns and pointed out that BP is still dependent on short-term oil prices – not good with the Brent crude oil contract currently at around $ 42 / barrel, down more than 35% from the beginning of the year – to finance operations. . It will also come up against what is a growing cash crunch: the market for disposing of fossil fuels is now happening in a buyer's market, BofA analysts pointed out.
Finally, BP is now in a market that can be as competitive as anything in the oil and gas world; Renewable projects that are ready to go online in the short term are in high demand. In that race, even a small lead can provide a serious financial advantage.
BP is up against not only its older competitors, but also local utilities and first-time pilots such as Spain's Iberdrola and Denmark's Ørsted – formerly the country's national oil and gas company – which has built up its renewable portfolios for years, especially in offshore wind power.
BP may have a vision. But investors are now waiting to see if it can really stand out in the race to carbonate.
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