Stocks split into a simple taxonomy: the already green and the greening. BP’s Bernard Looney sees the oil producer as one of the latter, trying hard to decarbonise itself. Since taking over as chief executive a year ago he has set tough targets to make BP a net zero emitter by 2050. But the stock market has given him little credit. BP’s share price has trailed its rivals in Europe for the past year.
Full-year results on Tuesday did nothing to dispel the gloom. A loss of $5.7bn for 2020 was the first in 10 years. Underlying profits of $115m in the final quarter covered only a third of analyst expectations. Bullish analysts at Barclays could only wince at a poor cash flow out-turn in the final three months. Tellingly, BP’s share price lost 3 per cent on a day when peers gained, as did crude prices.
Shareholders have mixed views on BP’s strategy, according to a Bernstein survey. No wonder, given the lack of response to Mr Looney’s efforts so far. Despite a 40 per cent cut in oil (equivalent) production, BP targets roughly a 13 per cent return on capital employed by 2025. That looks a long way from the minus 3.8 per cent of last year. Mr Looney maintains that those companies trying to transition deserve some credit, and patience.
Speaking of credit, equity investors are not the only ones with qualms. S&P late last month laid out its concerns for the oil sector. Though it did not put BP on “negative watch”, as it did with some others, S&P pointed out that BP lacked sufficient operating cash flow to support its net debt. The agency would like that proportion, currently below 30 per cent, to move towards 40 per cent. BP counters that it will soon cut about $4bn from its $38.9bn of net debt, which should help close the gap. Even so, without further increases in the oil price, expect no quick increase in share buybacks to offset the loss of dividends last year.
Perhaps Mr Looney himself was a bit green behind the ears to expect the market’s embrace so soon. But investors are still right to ask why his strategy has not yet received approval from the market.
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