BP sets sights further afield after reaping oil and gas benefits

Amid the political storm of surging energy prices and the uncertainty of European gas supply thanks to the threat of a Russian invasion of Ukraine, BP (BP.) has delivered an almost-decade high December quarter profit and set new long-term green targets. 

The supermajor, which has significant Russian business through its stake in Rosneft, reported underlying replacement cost (RC) profit, its preferred measure, of just over $4bn (£3bn) for the fourth quarter, and $12.8bn for the full-year.  

This turnaround from 2020, which saw an underlying RC loss of $5.7bn, has come thanks to the very strong oil and gas prices from the second half of last year. The company said further volatility in gas markets was likely because of geopolitical “uncertainty” and low storage levels, although it forecast a more stable oil price this year. 

That uncertainty continued this week, when US president Joe Biden said the Nord Stream 2 pipeline would be scrapped if Russia invaded Ukraine. A final rejection of Nord Stream 2 – a 750-mile completed pipeline – would make supply to Germany and the rest of Europe more difficult. The new year’s warmer weather has eased the energy crunch, but there are still longer-term concerns over the reliance on Russia for gas supply.  

BP chief executive Bernard Looney indicated longer-term support for gas in the UK, saying the company was keen to “link gas and electrons to create reliable power”. The ‘electron’ part of the equation will be electricity generated from wind turbines in Scotland. “Reliability and affordability matters as well as [energy being] clean,” he said. 

But it was the traditional side of the business that drove the uptick in shareholder payouts. BP has joined the other energy giants in handing back more of its increased earnings, through another $1.5bn in buybacks, on top of the $1.7bn completed in the fourth quarter. 

Both BP and Shell (SHEL) have sold off major projects in the past two years – Alaska for BP and the Permian assets for Shell – and have collectively handed billions of dollars back to shareholders. 

The quarterly dividend remains at 5.46¢. 

While it did not beat analyst estimates as extensively as Shell and the US supermajors, BP made the more significant changes in its shift toward greener assets. It has now set an annual cash profits target for the bioenergy, convenience, EV charging, renewables, and hydrogen units of $9bn-$10bn by 2030, with $2bn-$3bn of this from renewables. 

Hydrocarbons are forecast to provide $30bn-$35bn in average yearly cash profits between 2025 and 2030, by comparison. Jefferies analyst Giacomo Romeo said there was a “good financial outlook” for the next decade but the short-term numbers were disappointing, with upstream output flat on 2021, and first production from the Tangguh gas project pushed back to next year. 

More specifically, BP is set to increase oil production this year but will see a drop in output from its gas and low carbon division. Between 2022 and 2030, the company wants to drop overall oil and gas production from over 2mn barrels of oil equivalent per day (boepd) to 1.5mn boepd, largely through divestments.

Looney said there was no hurry to get projects off the books in the short term. He said the company had already made “strong progress” in its major transformation plans and would add a new goal of hitting net zero carbon emissions for all operations and sales by 2050. He said BP was still “rejecting a lot” of renewable projects amid concern of a green energy bubble driven by energy giant investment. 

Looney was evangelical about the market opportunity in electric vehicle (EV) charging: he said BP sold more power to EV drivers in the December quarter in China than it did in the whole of 2020. 

He added the company was continually having its assumptions challenged, using the example of a charge point in London that was in use 67 per cent of the time, compared with company expectations for “single-digit” utilisation rates. Margins are currently similar to the sale of petrol. 

The energy transition is at an interesting point: on a short-term basis, oil companies are high-performance cash machines while investors holding the iShares Global Clean Energy ETF (INRG) are looking at a two-fifths decline in the past year. BP's share price is up three-fifths in the same time. These moves are off different bases, to be sure – BP is not yet back to its pre-Covid-19 valuation – but go against assumptions of continual share price growth based on green projects. 

BP has the lowest forward price-to-earnings ratio of the supermajors, as well as the most ambitious transition plan. We have been bearish on BP for some years, but do see some promise from its current strategy. Mid-portfolio shakeup this is still a risky buy-in point, however. Sell. 

Last IC View: Sell, 348p, 2 Nov 2021