BP (BP.) investors will be looking at a whole different company within just a few years, under a dramatic new plan. The dividend is being cut by a half for the foreseeable future and the supermajor will allow upstream production to drop by 40 per cent in the next decade.
Chief executive Bernard Looney sprung this plan on investors early, having flagged a September announcement for his net zero carbon emissions strategy when it was unveiled in February.
The goals revealed back then included net zero carbon emissions by 2050, although this only comprises fuel that BP produces - rather than all the fuel sold on to customers of its retail network.
The company is also aiming to cut emissions from operations by 30-35 per cent from 2019 and to see a 35-40 per cent drop in emissions “associated with the carbon” in upstream oil and gas production.
New goals for 2030 include shifting low carbon capital spending from $500m a year to $5bn, taking it to around 20 per cent of the capital budget by 2025; increasing renewable energy capacity from 2.5 gigawatts last year to 50GW; and, doubling the number of customers coming into BP's retail outlets globally, to 20m a year.
The 2030 goals do not necessitate carbon offsets like carbon capture and tree planting, although these will be needed for the 2050 net zero goal.
The group will maintain capital spending at current levels, but will aim for $25bn in divestments between now and 2025. This includes the recent Alaska and petrochemicals sales, so there will be another $11bn or so under this plan.
Mr Looney said that BP was changing from “a company driven by the production of resources to one that that's focused on delivering energy solutions for customers”.
As this lower-carbon strategy comes in, shareholders will be paid a quarterly dividend of 5.25¢ - half the payment as increased by former boss Bob Dudley on his last day in February. When cash flows recover, this will be topped up by 60 per cent of “surplus cash” being handed over as buybacks, as long as net debt is below $35bn.
Mr Looney acknowledged that the dividend cut would hurt investors, but said it was in their long-term interests.
Fellow London-listed supermajor Royal Dutch Shell (RDSB) cut its dividend in April after a 70-year unbroken run of increasing investor payouts, compared with BP’s 10-year run after the Deepwater Horizon disaster.
Shell also has a plan for net zero carbon emissions by 2050, and will expand on its strategy by the end of the year.
BP's chief financial officer Murray Auchincloss said that the company would be changing its approach to investing with the new strategy. “Life becomes much more complicated in this new world,” he commented on an analyst call, outlining the difficulty in forecasting the various costs of renewables projects compared to running the numbers on an oil or gas well.
The group already has wind assets and a 50 per cent stake in solar business Lightsource BP - so it is not a total stranger to the renewables sector.
The first half showed why BP’s new strategy is not purely an environmental measure. Because of Covid-19 and the Saudi-triggered oil-price crash, the underlying replacement cost (RC) loss was $6.7bn (£5.1bn) for the June quarter alone, and $5.9bn for the entire trading period. For comparison, last year's underlying RC profits were $2.8bn and $5.2bn respectively.
The reported six-month figures were hit by a net non-operating charge of $14.5bn within the upstream division, largely pertaining to impairments as BP cut its medium- and long-term oil price forecasts.
The upstream division saw the biggest loss on underlying RC terms in the first half, swinging from a $6.3bn profit last year to a $6.6bn loss in 2020. The downstream business did relatively well, posting a $2.3bn underlying RC profit, constituting a drop of 26 per cent year-on-year.
The company is aiming to increase returns at the same time as these massive changes. Panmure Gordon analyst Colin Smith said that the credibility of the financial targets will "rest on how profitable the pivot to low carbon proves", and was sceptical that policy support from governments would come through to make this happen.
BP will hold onto its 20 per cent stake in Rosneft, saying it was a “fundamental” part of the portfolio and gave it a strong presence in Russia.
This decision was the one criticism that Greenpeace UK had of the group's announcement. The environmental organisation said that the strategy overall was a “necessary and encouraging start” for BP cutting its emissions.
The company’s share price was up 7 per cent on the news, to 302p.