Page 6 - MEOG Week 39

MEOG COMMENTARY MEOG

BP shares fall to 25-year

low, as investors doubt

clean energy strategy

BP chief Bernard Looney has struggled to convince investors
that the company’s clean energy goals are achievable.

CORPORATE CEO Bernard Looney and other top managers replacing retiring head Bob Dudley. Since day
at BP made a series of presentations earlier this one he has been clear about his desire to put the
month, in which they fleshed out the UK major’s company on a much cleaner path.
WHAT: grand strategy for transforming itself into a clean BP plans to grow its renewable energy capac-
BP’s share price has energy giant. But investors are unconvinced, and ity from 2.5 GW to 20 GW by 2025, and 50 GW
fallen to its lowest level the company’s share price slumped to a 25-year by 2030, primarily focusing on offshore wind.
since October 1995. low last week. These are considerable numbers, especially as
BP Week took place between September 15 the world’s largest wind developer Iberdola only
WHY: and 17, and saw the company’s management has around 18 GW of capacity up and running
The slump indicates team devote over 10 hours to explaining how it right now.
that investors are can not only survive but thrive in a low-carbon However, wind energy is costly. BP
unconvinced by BP’s future. The plan includes a 40% cut to BP’s oil and announced on September 10 a $1.1bn invest-
strategy of becoming a gas production over the next decade, along with ment in two offshore wind projects under devel-
clean energy giant. a tenfold increase in clean energy investments. opment by Norway’s Equinor. Their generation
BP’s share price closed in London at is due to reach 0.7 GW within five years, of which
WHAT NEXT: GBP2.324 ($2.95) on September 24, its lowest BP will net 0.35 GW. This means the UK major
Oil majors face level since October 1995. While weaker oil prices is effectively paying $3.1bn per GW, suggesting
difficulties trying to build and fears of a second coronavirus (COVID-19) that BP’s 2025 target may cost over $60bn to
up their clean energy wave were contributing factors, the decline indi- achieve.
operations at a time when cates that Looney’s pitch was unsuccessful. It is questionable how BP can devote this
low oil prices mean they While BP’s change in direction has been much capital expenditure, especially given cur-
are cash-strapped. But hailed as bold, “investors remain sceptical,” rent constraints on its cash flow. Indeed, BP cur-
failure to diversify into Mirza Baig of Aviva Investors was quoted as say- rently assumes it will spend only $5bn per year
renewables also carries ing by Bloomberg, “particularly as this move is on low-carbon projects, with two-fifths of that
significant risks. being forced on the company by climate change.” sum going towards non-generation infrastruc-
BP “didn’t detail how they planned on meet- ture such as electric vehicle (EV) charging.
ing their targets,” one major investor told the “For BP to meet its low-carbon target of 50
Financial Times. “There were just a lot of McK- GW of renewable generation capacity by 2030,
insey slides.” considerable growth is required over the com-
“In this sector, intentions mean very little ing years,” Stuart Lamont of Brewin Dolphin
because companies have a poor track record of Holdings says, according to Bloomberg. “This
capital allocation,” RBC Capital Markets’ Biraj will require discipline from the company, ensur-
Borkhataria said, stating that the major needed ing a delicate balance between working towards
to do more to convince investors it can deliver decarbonisation targets while achieving attrac-
on its promises. tive returns for shareholders.”
Others have argued that investors may need At the same time, Looney has promised
more time to decide on BP’s new strategy. investors returns of 8-10%, which while not as
“Investors need to digest the numbers, assess high as many oil project returns, are still greater
BP’s assumptions and come up with a reasonable than those clean energy investments currently
view on the feasibility of achieving some of the yield.
targets,” Bernstein’s Oswald Clint argued. The CEO says BP can leverage its experience,
integration, low borrowing costs and trading
High targets clout to push up returns. But investors will need
Looney took the helm of BP in February, to see these returns to believe them, analysts at

P6 www. NEWSBASE .com Week 39 30•September•2020