BP Can Afford to Be Radical on Climate Change
(Bloomberg Opinion) -- Bob Dudley leaves BP Plc having almost settled the financial costs of the Deepwater Horizon tragedy in 2010 and overseen a necessary overhaul of safety, and more generally culture, in response to the disaster. Successor Bernard Looney inherits a financially strong company. That only increases the incoming CEO’s responsibility to upgrade BP’s strategy to meet the climate crisis.
BP and Anglo-Dutch rival Royal Dutch Shell Plc face the same triple demands on the prodigious cash flow they generate. Some investors want higher dividends. Some prioritize debt reduction. Some want to see a greater investment in renewable energy.
On Tuesday BP lifted its annual shareholder payout, a parting gift from Dudley that ends a freeze in place since mid-2018. That looks punchy given net debt was still a high $45 billion at the end of last year, equivalent to 31% of total capital versus BP’s 20%-30% target. But $7 billion of proceeds due from recent disposal agreements should help bring leverage into the range this year, with additional support from more earmarked deals.
The modestly raised $8 billion dividend bill looks affordable, even with oil prices lower now than they were in 2019. Organic free cash flow last year, stripping out compensation for the Gulf of Mexico disaster, was around $13 billion after interest costs. What’s more, Gulf-related payments are settling at around $1 billion.
The contrast with Shell is increasingly stark. BP’s peer is still grappling with the financial stretch of buying gas group BG Group Plc in 2016. Its net debt was $79 billion at the end of December, rising absolutely and moving further away from Shell’s target as a percentage of total capital. Organic free cash flow, after interest payments and adjusting for working capital movements, was about $20 billion, funding a $15 billion dividend bill. There is huge pressure on Shell’s disposal program to cut debt.
Simultaneously, Shell is trying to lower what it spends on dividends by buying back shares and canceling them. Yet the more Shell spends on share buybacks, the less there is for debt reduction. In a period of oil-price weakness, Shell cannot have its cake and eat it.
But strategically, Shell appears ahead of BP when it comes to the energy transition. It has a target to reduce emissions generated by its products when used. BP does not, blaming a lack of standardized measures. The development of a BP strategy to assist global decarbonization appears to have paused. A charitable explanation is that the company is simply waiting for Looney to take over. But there is really no time to lose.
Financial strength gives Looney options as he assumes power. Capital expenditure is currently at the bottom end of BP’s target range. Looney must address how much of the company’s cash will flow out via share buybacks and dividends and how much must be spent by BP in order to cut the emissions for which it is responsible, while working to develop low-cost, clean energy sources. Soothing financials may give the impression all is well, but Looney’s own legacy will depend on addressing some increasingly urgent strategic questions.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
©2020 Bloomberg L.P.