“Performing while transforming” was the heading beneath which BP Plc (LON:BP) summarised its operations in Tuesday’s fourth quarter results statement. The message appears quite simple, but, does it ring true?
BP is working to fulfil an ambitious strategy.
It is one of the world’s largest publicly owned oil producers. Its recent history – and ultimately a significant portion of its legacy – is dominated by its role as the operator of the largest ever crude oil spill.
Yet, under freshman chief executive Bernard Looney, BP is trying to lead the way as a new type of energy company.
The idea is for BP to become a diversified business comprising renewable power, biofuels and cleaner gas fuels such as hydrogen – whilst retaining a material presence in the petroleum industry.
Looney in August laid out the group’s plans to cut BP’s hydrocarbons business by around 40% over the next ten years.
At the same time he kicked off a US$5bn a year renewables investment programme, targeting a 20-fold increase in generation capacity.
That initiative has already seen the acquisition of a US wind power operation, the launch of a solar power company and an acceleration of hydrogen fuel ventures.
The noises coming out of BP suggest that the winds of change are brisker than expected.
It highlighted today that nearly 10,000 people had or are in the process of leaving the hydrocarbons busines as part of the transition. This echoed reports in January which claimed BP’s exploration headcount had dropped beneath 100, from over 700 in recent years.
BP is still very much an oil company.
Like many oil companies last year, BP has been struggling with lower crude pricing and a pandemic that has restricted travel, frozen swathes of ‘non-essential’ industry and decimated demand in key markets.
Who’s to say how many of the 10,000 jobs cut in the name of transition and ‘net zero ambition’ would’ve be lost as a consequence of ordinary cost-cutting, COVID and furlough.
Nevertheless, BP today said it expects some US$1.4bn of people-related costs tied to what it termed the ‘reinvent programme’. Most of the costs are due in the first half of 2021.
BP racked up US$20.3bn of losses for 2020 including the trading impacts of low prices and squeezed margins, along with significant asset write-offs (particularly to the value of exploration projects and undeveloped oil and gas resources).
That it was able to mark a profit for the quarter only reflects a one-off sale of an entire business division (a US$2.3bn gain from the divestment of petrochemicals to INEOS).
BP has been selling off assets for years in the wake of the 2010 oil spill and the subsequent compensation.
In the fourth quarter, divestments totalled US$4.2bn and in 2021 it has already agreed a US$2.6bn stake sale from a project in Oman. The company highlighted that it has so far completed or agreed more than half of its US$25bn target for divestments for this year.
Keeping shareholder’s onside, somewhat, BP has stuck with a 5.25 US cents per share quarterly dividend and noted a net debt pile of US$39bn at the end of 2020, marking a US$6.4bn reduction for the year.
The reality is that the company’s transition is pre-existing and ongoing, even if there’s a new vision for what the company can become.
Early days for ‘new’ BP.
A cynic may say the stock market is merely seeing decisions of necessity framed as a social and environmental conscience.
Its not clear where BP will rank in the ESG league tables as this strategy progresses.
A pragmatist might assume a balanced view should prevail though that might prove to be naïve.
Climate activists and advocates will perhaps claim that the time for patient pragmatism has gone. Will they accept evolution instead of revolution?
More pertinently, will ESG-minded stakeholders accept a sort-of hydrocarbon purgatory?
BP production averaged 2.37mln barrels of oil equivalent per day in the fourth quarter of 2020, down 9.9% on the prior year.
Assuming the company meets its objectives and ‘net zero ambition’, reducing hydrocarbon output by 40% in ten years, how does the environmental messaging stand up whilst production still measures over 1mln barrels a day, for example.
Objectively, we are talking about a positive and substantial commitment from one of the world’s largest oil companies, regardless of whether it is driven by a public relations narrative. One might even go as far as to say it is admirable.
But it is not obvious that the old BP will be compatible with the new BP envisaged by Bernard Looney.