BP doesn’t want to be an oil company any more (Emily Gosden writes). Last week it announced plans to transform itself into an “integrated energy company” over the next decade by investing billions in building wind and solar farms and letting its oil and gas output decline.
It’s about time, too. The world cannot continue burning oil and gas at present rates if the worst extremes of dangerous climate change are to be avoided; sooner or later, oil majors’ traditional business models must become obsolete. For reasons of self-preservation, both corporate and global, BP needs to change.
In February, Bernard Looney, the new chief executive, made a bold start by pledging to eliminate the carbon footprint of the oil and gas that the company produces to “net zero” by 2050. Understandably, many were sceptical about Mr Looney’s apparent Damascene conversion after his decades working in the heart of BP’s oil and gas operations, most recently leading its exploration and production division.
Last week, though, Mr Looney, 49, added some much-needed substance by committing to boost BP’s annual low-carbon spending from a paltry $500 million last year to $5 billion by 2030. He wants to build 50 gigawatts of renewables by 2030 — equivalent to the existing renewable capacity of the UK — funded by the proceeds from its continued oil and gas business.
Investors liked what they heard. BP’s shares rose more than 6 per cent on the day, despite halving its dividend and reporting its biggest quarterly loss of $17.7 billion at the same time. However, the shares were rising from a low base; they had fallen by more than 40 per cent this year in anticipation of the dividend cut as the pandemic hammered profits and forced BP to cut costs, including 10,000 of its 70,000-strong global workforce.
If anything, the new dividend proposition looks better than had been feared: the fixed, lower payout offers a prospective yield of about 5.5 per cent, but comes with the promise of buybacks that could bolster shareholder returns to double digits by 2022, oil price permitting.
Where investors remain rightly nervous is about BP’s ability to execute on its promised new strategy. That $17.7 billion loss was driven by huge writedowns in BP’s native oil and gas business after it cut its long-term price assumptions, which had looked over-optimistic even before the coronavirus pandemic struck, and wrote off exploration costs for fields that it now won’t develop. Many of these writedowns stem from historic spending, but questions remain over its judgment in more recent oil and gas moves, notably outbidding others to splurge $10.5 billion on BHP’s American shale assets only two years ago on Mr Looney’s watch.
Now BP is asking investors to believe that it can beat renewables companies at their own game and deliver market-leading returns, even in sectors in which it has no previous experience, such as offshore wind.
It is entering a crowded space. Not only is it up against established players, but also most European oil majors are boosting green spending, too. Underscoring the challenge, Royal Dutch Shell has so far struggled to find an attractive entry point to the UK offshore wind market and was outbid for Eneco, the Dutch renewables group.
Oil executives hope to emulate Orsted, which has soared in value since ditching its oil and gas roots in favour of offshore wind. But it benefited hugely from first-mover advantage. More competition is likely to spell lower returns for those, such as BP, that are playing catch-up.
BP’s bold strategic shift was the right thing to do, but in a sense it was also the easy bit. Executing it successfully will be much harder.
ADVICE Hold
WHY New strategy is to be welcomed, but execution will be key. Hold pending evidence of delivery
Morses Cub
Only a month after Morses Club issued a trading update, yesterday it offered up another one — and it was encouraging (Katherine Griffiths writes). The lender to people on lower incomes and with impaired credit histories said that trading was almost back to where it had been before the Covid-19 pandemic struck.
Morses Club’s home-collected credit division is the second largest in Britain after Provident Financial, with 224,000 customers. The West Yorkshire-based business said in July that it had launched a service that would allow its lending process, including checking potential borrowers’ identifications, to take place online without the need for its agents to visit customers’ homes. It meant that Morses could lend to new customers again.
The service had bedded down well. Collections last month in the dootstep lending division rose to 98 per cent of normal expectations, up from 91 per cent at the end of June, and are expected to reach pre-virus levels by the end of August. Repayments are also being maintained. There has been 100 per cent payment to terms for new customers and 97 per cent for existing customers.
Morses is making changes to the way it does business, with employees and agents working from home until the end of the year. That is likely to lead to a reduction in its office space, triggering cost reductions, according to John Cronin, an analyst at Goodbody. The company is also pushing into digital lending through its Shelby Finance division, where collections are running in excess of pre-pandemic levels. The division is made up of Dot Dot Loans, an online lending provider, and U Account, which offers online e-money current accounts.
Gary Greenwood, an analyst at Shore Capital, the broker, said that Morses’ management had handled the coronavirus turmoil well, but would need to proceed with caution as the business expands its digital lending, where loans tend to be larger and over a longer period than in the doorstep lending division, “so as not to get caught out by the impact of rising unemployment as government support schemes expire”.
ADVICE Buy
WHY Capable of managing loans to higher-risk customers
