Recent drops in oil prices have left bp reeling with some of the worst quarterly results ever recorded. However, share prices recovered 6.5% after the international oil company announced a complete business shift to promoting low-carbon, customer-centric solutions.

bp revealed the energy transition strategy alongside its first dividend cut since the Deepwater Horizon oil spill disaster. Second-quarter losses were recorded at $16.8 billion, compared with a profit of $1.8 billion for the same period last year. This was a direct impact of the coronavirus pandemic and completely slashed the value of its oil and gas assets.

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Decarbonisation

The company’s new strategy will reshape its business from being an international oil company focused on producing resources to an integrated energy company focused on delivering solutions for customers. This is indeed a timeous transition, as the world shifts from carbon-heavy energy production to climate-friendly clean energy options.

Helge Lund, bp’s chairman, said: “Energy markets are fundamentally changing, shifting towards low carbon, driven by societal expectations, technology and changes in consumer preferences. And in these transforming markets, bp can compete and create value, based on our skills, experience and relationships. We are confident that the decisions we have taken and the strategy we are setting out today are right for bp, for our shareholders, and for wider society.”

The plan in a nutshell

  • 10-fold increase in low carbon investment by 2030, with up to 8-fold increase by 2025;
  • Partnering with 10-15 cities and 3 core industries in decarbonization efforts and doubling customer interactions to 20 million per day, all by 2030;
  • Capital intensity decreasing as major project wave completes, combined with continued efficiency focus, to drive earnings and ROACE growth;
  • Production declines by 40% by 2030 through active portfolio management;
  • No exploration in new countries;
  • Emissions from bp’s operations 30-35% lower by 2030;
  • Emissions associated with carbon in upstream oil and gas production 35-40% lower by 2030;
  • Carbon intensity of products bp sells lower by more than 15% by 2030.

Over the same period, bp’s oil and gas production is expected to reduce by at least one million barrels of oil equivalent a day, or 40%, from 2019 levels. Its remaining hydrocarbon portfolio is expected to be more cost and carbon resilient.

The company further aims to develop renewable energy capacity, grow its hydrogen business and significantly increase the number of available EV charging points.

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Hindrances to institutional investors putting more capital into renewables

bp has also set out a new financial frame to support a fundamental shift in how it allocates capital, towards low carbon and other energy transition activities. The combination of strategy and financial frame is designed to provide a coherent and compelling investor proposition – introducing a balance between committed distributions, profitable growth and sustainable value – and create long-term value for bp’s stakeholders.

As part of the investor proposition, bp’s board has introduced a new distribution policy, with two elements:

  • the dividend reset to a resilient level of 5.25 cents per share per quarter, and intended to remain fixed at this level, subject to the board’s decision each quarter, supplemented by
  • a commitment to return at least 60% of surplus cash to shareholders through share buybacks, once bp’s balance sheet has been deleveraged and subject to maintaining a strong investment grade credit rating.

Bernard Looney, bp chief executive officer, said: “We believe that what we are setting out today offers a compelling and attractive long-term proposition for all investors — a reset and resilient dividend with a commitment to share buybacks; profitable growth; and the opportunity to invest in the energy transition.

“I want to acknowledge the impact the reset dividend will have on many – whether individual retail investors or large holders. However, it is a decision that we wholeheartedly believe is in the long-term interest of our stakeholders.”

Will Scargill, managing oil & gas analyst at GlobalData offers his view on this transition: “bp has set out ambitious targets for the realignment of its business within five and ten-year time frames. An overhaul of this scale will require significant movements in the M&A market if it is to be delivered in the targeted timeframe.

“Among its growth plans for low-carbon energy sources, bp’s target for renewable power generation capacity is a big ask. Its most significant renewables interests, at present, come from its 50% stake in Lightsource BP, which targets 10GW by 2023. To reach 20GW by 2025 and 50GW by 2030 will likely require significant acquisitions on top of the expansion of capital spending that BP has set out.

“In terms of its traditional oil and gas segment, BP will need to offload assets that are not high-grade to hit its targets of improving returns on capital from a reduced asset base. It is following up its previous $15bn divestment target with a target of $25bn for the period 2020-25. Assets most likely to be put on the market are legacy positions with little growth potential.”

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