Yahoo Finance Questor: as incoming boss mulls a cleaner future, BP’s strength gives him room to breathe
Bernard Looney is the tractor fanatic who must help BP plough a new furrow. Chief executive from next February, the Irish farmer’s son has to figure out how accelerating demands for a zero-carbon future fit with the FTSE 100 giant whose generous dividends are powered by grubby oil and gas.
Mr Looney’s problem is not just that calls to take action get louder by the week, thanks to well-drilled activists, shareholders and even the Royal Shakespeare Company, which recently ended its BP sponsorship deal early. It is that what comes in oil’s place – solar, wind and perhaps biofuel – offers slimmer margins.
Almost 10 years on from the fatal Gulf of Mexico oil spill, Mr Looney’s predecessor, the outgoing Bob Dudley, has rebuilt BP’s reputation and is on the way to rebuilding its finances too.
Mr Looney must be loathe to bet the farm on new energy sources when upstream production rose by 3pc last year to a level not seen since 2010. As head of upstream, he has overseen numerous new projects coming to fruition, including Clair Ridge, to the west of Shetland in the North Sea.
In doing so he has preached efficiency, which is the best some fossil fuel producers can muster. Modernisation means BP’s break-even price is on the way to falling below $50 a barrel. That is material given Brent crude is changing hands at $58 a barrel.
The market is more immediately concerned by weaker global economic growth and excess supply but the attack last month on Saudi oil facilities, widely blamed on Iran, signalled fresh turmoil in the Middle East that could spark higher prices.
Opec says it is too early to debate more production cuts. Regardless, BP has plans to add another 900,000 barrels a day of new production by 2021, when the new $9bn (£7bn) Argos platform on the Mad Dog field in the Gulf of Mexico should be on stream.
A turning point for the company came in the summer of last year with the surprise $10.5bn acquisition of miner BHP’s US shale oil and gas assets. It was the company’s biggest deal in almost two decades and was accompanied by the first rise in the dividend for more than four years, demonstrating improving confidence and balance sheet strength.
Mr Dudley promised to trade out of older assets, setting a target of $10bn of disposals by the end of 2020. BP said on Friday that the disposal programme was running ahead of schedule, at the cost of a non-cash after-tax charge of $2bn-$3bn in the third quarter of 2019.
In the short term this will increase “gearing” – debt as a proportion of shareholder equity – although the company said it should then fall to the mid-20s per cent.
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As well as tackling borrowings, BP is still stumping up an estimated $65bn in redress and clean-up costs for the Deepwater Horizon disaster. Oil spill payments cost it $3.2bn after tax last year. The payments will decline from here but continue for many years. That doesn’t appear to leave much scope for green investment.
However, the market for selling assets is predicted to improve and BP has shown it can be active in this area without stumping up all the funds. One example is Lightsource BP, a solar power developer operating in 10 countries that has attracted $7bn of third-party finance since BP bought in, according to company watchers at RBC.
And don’t discount natural gas, which Mr Dudley threw his weight behind recently as vital in reducing carbon emissions even though its production generates methane.
Short-term City expectations for BP have drifted lower since the Alaska disposal. Trading at 11.7 times this year’s forecast earnings, the stock is cheaper than most of its peers, which are all facing up to the same quandary, and there is scope to squeeze more savings from the BHP assets.
There are those who believe these stocks no longer belong in anyone’s portfolio. But on the basis of the finances – Questor’s primary focus – BP is well positioned as Mr Looney considers his long-term vision. Keep holding.
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