Boston Consulting Group (BCG) has laid out a compelling path for oil and gas companies who want to stay relevant in a new report. With the firm’s self-interest in mind (who better to help companies navigate this difficult time?), its analysts say a giant leap is needed in terms of clean energy investment, internal emissions, data transparency and expectations on returns as oil supply overtakes demand.
Throwing capital expenditure (capex) into renewable energy is not a new idea, but BCG said it had to come alongside far greater transparency on emissions from current oil and gas operations to avoid regulatory crackdowns and loss of social licence. Royal Dutch Shell (RDSB) and Total have already started to inch down the more climate-friendly path with what BCG calls a ‘no-regrets’ strategy, where there are value and environmental benefits even if global warming is less severe than expected.
However, even as a leader in this shift, Shell is spending just 3-8 per cent of annual capital expenditure on renewables. BP has also talked about shifting spending further towards clean energy, but this comes at the same time as the company has sunk billions in upping its oil and gas reserves during the past year, adding 22 upstream projects since 2016 and 500,000-600,000 barrels of oil equivalent per day to production.
This strategy produced a solid set of first-quarter numbers for BP: while adjusted profit was well down quarter on quarter because of a weak oil price, that metric came in above analyst expectations – $2.36bn (£1.8bn) compared with consensus of $2.33bn – thanks to its production volume and trading income. It also added $600m to its coffers through divestments, leaving a $9.4bn target for the sales plan before the end of 2020. The major also hopes to get its gearing moving down from above 30 per cent within a few months.
Analysts at RBC Capital see promise in BP because of its “medium-term growth profile and improving cash-flow framework”, and has a target price of 12 per cent above the current 557p level.
However, the growth-through-M&A path starts to look shakier beyond the mid-2020s. Returning to the BCG numbers: oil and gas demand will grow 5-14 per cent up to 2025, but supply growth will be “10 percentage points above that level”.
BP’s strategy for the next decade has different demand/supply inputs. Alongside the release of first-quarter results, chief financial officer Brian Gilvary added insight into how management sees diversification away from oil and gas. “As the alternative energy businesses like biofuels, wind and solar, become significant enough, and material enough we will look at whether we provide more information on those,” he said. “But they’re still in the build phase, over the next five to 10 years, as we build those businesses out.”
Its electric car charging business in the UK, bought for £130m last year, is currently too small for the quarterly report, for example, with only 6,500 charging points.
BP’s pre-tax profit for the March quarter was $5.3bn (£4.2bn) before the usual Gulf of Mexico payment came out ($654m this year), a 22 per cent fall on the December quarter, and its own underlying replacement cost profit number (post-tax and gulf payment) was 8.8 per cent down year on year at $2.358bn.
