BP PLC’s BP-N share price rallied this week after the British-based energy giant released its quarterly financial results, but the gains had little to do with gargantuan profits or a big dividend hike.
Instead, it appeared largely tied to the company’s updated commitment toward slashing its oil and gas production by 2030: With profits booming from robust fossil fuel prices, there’s now going to be significantly less slashing in the coming years.
“Yes, we need lower-carbon energy, but we also need secure energy and we need affordable energy. And that’s what governments and society around the world are asking,” Bernard Looney, BP’s chief executive officer, said on a call with analysts this week.
It’s a pivot that other producers are likely noting as surging profits from oil and gas lead to a fresh appreciation of traditional energy assets.
And investors need to gauge whether the recent explosion in oil-related profits can last. The energy sector within the S&P 500 Index has delivered profit growth of nearly 60 per cent in the fourth quarter compared with last year, according to I/B/E/S data from Refinitiv.
That’s the best growth for any of the major sectors within the index so far in the reporting season, and stands in stark contrast to declining profits for the overall index.
In addition to this growth, investors and analysts have also lauded cash-flush energy producers over the past year for their shareholder-friendly approaches: Companies with enormous profits have directed much of their excess cash toward dividends, share buybacks and debt repayments.
In keeping with this trend, BP announced a 10-per-cent increase to its dividend this week and an additional US$2.75-billion share buyback plan. It has reduced its net debt by US$9.2-billion over the past year.
But the announcement that really delighted investors – if the 8.4-per-cent gain in the share price on Tuesday was any indication – added a new dimension to the concept of shareholder-friendly.
BP now plans to reduce its fossil fuel production by 25 per cent by 2030, compared with 2019 levels. That’s down significantly from a previous reduction target of 40 per cent. The company will retain its fossil fuel assets for longer and ramp up spending on oil and gas production by an additional US$8-billion by 2030.
These goals are underpinned by BP’s more optimistic assumption for the price of Brent crude – a global benchmark for oil – over the rest of the decade. BP now expects oil prices will average US$70 a barrel, up from US$60 a barrel previously and easily enough to keep dividend increases coming.
The company is also tempering its bets on wind and solar power generation, where expected returns are far lower than for fossil fuels.
According to Paul Cheng, an analyst at Bank of Nova Scotia, BP will spend an average of US$3-billion to US$5-billion a year through 2030 on renewables. That’s down from US$4-billion to US$6-billion previously.
“We think the reduced investment in wind and solar should be well-received as the limited return potential in renewable power has been a big source of concern,” Mr. Cheng said in a note.
Valuations help illustrate his point. Stocks of European-based energy giants that have been emphasizing a transition to renewable energy – companies that include BP, Shell PLC and TotalEnergies SE – trade at about six times estimated 2023 earnings.
U.S.-based energy producers, which have not embraced renewables in the same way, enjoy higher valuations: Exxon Mobil Corp. and Chevron Corp. trade at about 11 times estimated earnings.
Clearly, the energy sector remains a tough place for environmentally conscious investors. Some may have consoled themselves in the expectation that oil and gas producers would transition from fossil fuels to renewable energy, enticed by growth in solar and wind power and the rise of electric vehicles.
But dazzling profits from fossil fuels – a combined US$219-billion from the world’s six largest oil producers in 2022, according to Reuters – may be impossible for energy executives to resist.
Calgary-based Suncor Energy Inc. – which will report its financial results on Tuesday, followed by Cenovus Energy Inc. on Feb. 16 and Canadian Natural Resources Ltd. on March 2 – sold its wind and solar assets to Canadian Utilities Ltd. in a deal that closed Jan. 6.
Based on BP’s example this week, the stock market is keen to reward any sign of backsliding.
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