Big Oil’s Surprisingly Bright Future. The Case for BP and Exxon.22 Oct 2022 09:36
Extract from above article
BP makes a solid case that it’s really changing. The London-based company has said that by 2025 it will invest at least 40% of its capital budget in five areas meant to transition away from oil and gas production—bioenergy, convenience (which includes an expansion of gas stations), electric-vehicle charging, renewables, and hydrogen. BP and Norway’s Equinor are installing wind turbines off the East Coast of the U.S. capable of providing 4.4 gigawatts of power, or enough to power more than 2½ million homes. With its agreement this past week to purchase leading renewable natural-gas producer Archaea Energy (LFG), BP is on track to become one of the key biofuels producers in the U.S. Its oil production, meanwhile, is set to decline by 40% by 2030 from the level in 2019, the last year before the Covid-19 pandemic.
Environmentalists have applauded BP’s net zero announcement, but they want verification that the company will follow through. This isn’t the first time the energy giant has said that it would transition to cleaner energy. Twenty years ago, the company dubbed itself “beyond petroleum” and announced aggressive plans to invest in wind and solar. Although it bought renewable assets, the effort didn’t amount to much. BP sold many of its wind and solar assets a decade ago, before its recent turnabout.
“We were ahead of where society was in terms of acceptance,” says Dave Lawler, chairman and president of bp America. “This time, though, if you look at the climate, if you look at the Rivians, the Teslas, the focus on carbon capture, the latest laws that have been passed, this is the inflection point for society. We think we’re in step with that.”
BP has begun detailing the financial impacts of the shift. By 2030, the company expects its earnings before interest, taxes, depreciation and amortization, or Ebitda, from the new businesses to top $10 billion. To put that in perspective, the company’s total Ebitda in 2019 came to $34 billion.
Assuming that its profit margins from fossil fuels stay consistent, the company should be able weather declining production and pull in at least $30 billion annually by 2030—$20 billion from the traditional businesses and $10 billion from the new one. And given the rate at which it’s buying its own stock—at least $4 billion in annual repurchases through 2025—those earnings will be spread across a smaller number of shares, helping earnings per share.
Perhaps the biggest draw for now is a 4.8% dividend yield, and the company’s plans to increase the payout by 4% a year. Longer term, BP’s renewable plans look realistic and clearly profitable, wrote Morgan Stanley analyst Martijn Rats earlier this year in upgrading the shares to Overweight. The company is investing in “well-defined markets where BP has increasingly well-defined plans,” he wrote.
That, combined with strong returns from oil and gas, makes the shares look undervalued.
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