- Bernard Looney is demonstrating the ups and downs of transitioning away from oil.
- The BP chief executive on Tuesday announced expectations-beating second-quarter results, and hiked the company’s dividend.
- Which is great, except the recent higher crude prices that enabled the move are a mixed blessing.
A Reuters news source says that BP’s oil price boon is a mixed blessing.
Oil prices climbed to $73 a barrel
In absolute terms, oil prices that have climbed to $73 a barrel are obviously helpful for Looney.
In the second quarter they enabled him to cut net debt to 26% of total capital, maintain $13 billion of annual spending on renewables and hydrocarbon projects, and give investors a 4% hike to a dividend per share they had assumed would be fixed at 5.25 cents a quarter. BP shares duly rose by 3.5%.
Near-sighted investors encouraged
Yet higher crude prices also encourage near-sighted investors to focus on companies planning to pump lots of it.
In relative terms, Looney’s plan to cut oil and gas output by 40% by 2030 is a sharper drop than that currently envisaged by rivals like Royal Dutch Shell (RDSa.L).
It also sits awkwardly against BP’s decision to hike its oil price assumption from $55 to $60 for much of the rest of the decade, implying Looney’s group could forego some of that bonanza. And Shell last week hiked its own dividend by 38%.
What is unfortunate according to Looney?
The unfortunate thing for Looney is that oil investors seem to focus on companies’ ability to pay dividends now, rather than their less-concrete plans to develop a business beyond fossil fuels.
Prior to today’s hike, BP was pledging to pay about $4 billion in dividends annually.
Dividing that by its 7% cost of equity minus the 2% Morgan Stanley thinks dividends can grow in perpetuity gives $80 billion, in line with the UK group’s current market capitalisation.
That implies investors may not be assigning much value to the free cash flow that Looney is not distributing, some of which is going into wind farms and other green technologies.
What is Looney’s decision?
If investors basically value everything else at zero, then Looney’s decision to hike his dividend looks sensible.
But it’s a hard game to win. Morgan Stanley reckons higher prices mean Shell will be able to pay out $8.3 billion annually.
Ideally, investors would become less ostrich-like and twig that BP looks to have the better strategy to tackle climate change. But that doesn’t help Looney please investors now.
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Source: Reuters
