Tue. Jul 5th, 2022

If the story of recent UK oil and gas results is bad timing, then BP did better than most.

For a start, it avoided Shell’s snafu last week of announcing a quadrupling of earnings for 2021 and a whopping $ 8.5bn share buyback on the very same day that energy regulator Ofgem said the upper limit on energy bills would rise 54 per cent from April and the government announced a £ 9bn package to alleviate the resulting hardship.

Of course, BP’s highest profit in eight yearsboosted by surging oil and gas prices, plus a $ 1.5bn share buyback for the first quarter will elicit much the same response: calls, led by the Labor party, for a windfall tax on oil and gas company profits.

But BP timed something else right on Tuesday: its bumper results came with an update of its strategy for the energy transition that finally provides enough detail for it to make some sense.

One problem for the sector is that its rebuttal of a windfall tax – that it would deter investment – is true, but not right now. BP has already set its spending plans based on long-term oil price assumptions. Where it has “surplus” cash flow, and it had $ 6.3bn last year, 60 per cent of that goes to shareholders and the rest goes to paying down debt.

The latter in effect preserves its ability to keep investing through increasing volatility: BP may have managed underlying earnings of $ 12.8bn last year but it lost $ 5.7bn the year before as oil prices slumped to $ 25 a barrel. And the former is basically how you try to keep investors on board as you spend an increasing amount on new low-carbon businesses that they do not really understand and aren’t sure they like very much.

Leave aside the argument over whether we should be penalizing domestic gas production in a crisis largely caused by soaring international gas prices. The UK is certainly going to need more renewables and clean energy infrastructure such as charging points and hydrogen facilities. A politically motivated, short-term tax that hits the companies likely to provide it seems self-defeating.

BP, meanwhile, is starting to have a strategy that looks green enough for those focused on energy transition and with enough greenbacks for everyone else. It now thinks it can meet its target to cut fossil fuel production by 40 per cent by 2030 compared to 2019 levels while keeping ebitda roughly at current levels. This will not please everyone: it implied it would sell lower-margin production rather than shutting down output and eliminating those emissions. But it would be an impressive feat to squeeze that cash from the remaining higher-quality assets, given that production still needs to shrink about 30 per cent from last year.

Its investment plans in its low-carbon transition businesses – biofuels, convenience (forecourts and food), charging, renewables and hydrogen – now look meaningful. The oil and gas industry’s protests about its crucial role in transforming energy have been undermined by spending that has been slightly pathetic. Overall, it has been a tiny sliver of the hundreds of billions going into clean energy globally, notes RMI’s Kingsmill Bond. Low-carbon investment as a share of total capital expenditure was under 1 per cent for many companies from 2015 to the first half of last year, according to BloombergNEF data, with Shell and BP somewhere between 5 and 8 per cent.

BP says that 40 per cent of investment will be going into its five transition growth areas (which do not include gas) by 2025. By 2030, that should be 50 per cent. Ebitda from those businesses could more than triple, approaching perhaps a third of the total by 2030. Some growth areas, such as biofuels, offer markedly higher returns than the 8-10 per cent on offer in renewable energy.

BP’s problem is that none of its competing constituencies have been prepared to give it much credit for that as yet, in part because the oil and gas business is well understood and the rest has been slightly mysterious. Like politicians calling for a tax rise, the markets have been focused on cash today, not how investment could reshape these businesses for tomorrow. Time, perhaps, to take another look.


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