Summary

  • BP has suffered from relative headwinds since the Deepwater Horizon spill, but its renewable integration plan gives it a chance to move on.
  • The leadership team have fixed the dividend payout, which looks like a prudent move.
  • EV and clean energy adoption present new opportunities for the firm and they are planning ahead brilliantly.

The British Petroleum Company or BP (NYSE:BP) is one of the world’s largest oil and gas companies headquartered in London, England. While BP has been in business since 1909, the company is still trying to distance itself from the massive oil spill in the Gulf of Mexico back in 2010. The stock has been in a rut ever since despite oil prices being at historical highs. The company is now in the midst of a transition into clean energy. Today, we will look at BP’s current situation and see what investors can expect from the company going forward.

BP is one of the seven supermajors of the global oil and gas industry and operates in nearly 80 countries worldwide. However, the company has found itself in the middle of an unfavorable paradigm shift as the secular trends are implying a need for more environmentally conscious companies, particularly on the energy frontier; BP has had to face new challenges during what was already a difficult period.

Deepwater Horizon

The Deepwater Horizon was the largest petroleum spill in history. It occurred in the Gulf of Mexico on April 20, 2010. There was an unquantifiable toll on wildlife when a drilling rig had a massive blowout that took five months for the well to be completely sealed again. The spill caused an estimated 210 million gallons of crude oil to spill into the surrounding ocean, and tragically, eleven people were killed. The spill cost BP more than $20bn and annihilated their reputation. BP has also had a few other environmental issues in the past. But the Deepwater Horizon really stood out due to the nature of the circumstances leading up to the spill. The stock has never really recovered from the catastrophe. It has shown relative weakness compared to its peers regardless of oil prices or overall market sentiment for the better part of a decade.

Incorporating Renewable Energy

BP recently announced it was transitioning from oil to greener energy sources like renewable fuels, solar power, wind, natural gas, and hydrogen.

The company also stated its lofty goals of being net-zero on carbon emissions by 2050, after being one of the top carbon contributors for years. I believe this is a prudent decision for several reasons:

  1. The COVID-19 pandemic gave the oil and gas industry glimpse into a future where oil consumption is relatively minimal. But, unfortunately, OPEC was slow in reacting to the changing demand due to squabbles with low-cost producers. As a result, crude oil futures plunged into negative territory due to the resulting oversupply and, of course, speculators who were dumping the crude due to fear of settlement.
  2. EV companies like Tesla (TSLA) and clean energy companies like First Solar (FSLR) have been vital proof of concept. Last quarter Tesla delivered 200,000 vehicles globally, a number that looks set to increase quarterly at least for the short term. Widespread EV adoption could change supply and demand dynamics as production cuts likely won’t last.
  3. OPEC+ disunity also plays a role. Low-cost oil producers seem less and less inclined to cut their production to prevent oversupply and make high-cost producers profitable. This has given the appearance of rifts within OPEC+ as high-cost producers cannot compete at lower oil prices. I believe that this eventually devolves into a battle for market share, which will drive prices down, which is a big negative for BP.
    1. BP has also been experiencing an apparent stigma against its products in some circles following the Deep Water Horizon environmental catastrophe. In addition, it has exposure to a massive global network of gas stations which could see less and less volume over time. Adopting clean energy solutions allows the company to divorce itself from the crises of the past.

    Land that has housed a gas station is notoriously difficult to sell, so BP has done the prudent thing and started embracing electric charging stations as a part of their pivot into renewables at some point in the future to utilize all of those properties. The profile of customers for an EV charging station is very different from the traditional customer at a gas station. Typically it takes 4 minutes for a customer to fill a tank at a gas station, whereas Tesla Model 3s, for example, can take considerably longer.

This creates a new opportunity for operators where they have customers spending considerably more time around convenience stores with EV charging stations. BP has identified this opportunity, and to capitalize, they have purchased the Thorntons chain and are looking to grow their strategic site convenience network from 2,000 to 3,000 by the year 2030. This is while declaring they hope to become a Net Zero Company by 2050. They also outlined some lofty goals to achieve their target:

  • The company hopes to decrease its oil and gas production by over 40% and halt exploration in new countries.
  • They hope to cut operational emissions by 30-50%‎.
  • They also targeted a reduction in the emissions associated with the carbon in their upstream oil and gas production by 35-40%.‎With that, BP has given investors clear direction on the priorities going forward.

Adjustments To Repurchases and Dividends

Along with its updated vision surrounding renewable energy offerings, the company has communicated its plans towards distributions. The company looks set to maintain a flat dividend payout and focus on share repurchases.

This is a positive as the stock price is quite low right now, and retiring shares at these advantageous prices will be good for shareholders down the line. We can see that in the past, the dividend has been a staple for BP shareholders, but they’ve been getting buried with negative price action lately, so a repurchase to support the stock should be welcomed here.

Conclusion

The fossil fuel industry will still be around for decades; that much we know. It’s the market share of global energy resources that is being debated hotly. My view is that oil demand will continue to increase, but production increases, especially from low-cost producers, could outpace the increases. OPEC is still in control of prices in the short term, and EV/clean energy production has not yet started to have a devastating influence. From a profitability and capitalization standpoint, BP is still finely poised to make a renewable transition work. I believe the current dividend plan is still attractive and that BP will be a key player in the renewable arena before too long. This is a storied company, and they are not where they are by accident. I rate BP as a long-term Buy.

Source: https://seekingalpha.com/article/4441328-bp-long-term-buy-on-renewables-pivot