BP’s Big Shift Could Signal a New Energy Boom

Starting around 2020, big oil companies, particularly in Europe, unveiled long-term strategies that included less drilling for fossil fuels and more investments in clean energy.
BP
‘s (ticker: BP) new strategy sends a slightly different message: In the near term, the world’s going to need more of both. The London-based energy company says it will phase out oil and gas more slowly than previously expected, while ramping up clean energy faster than it had anticipated. All told, the changes could result in its capital spending increasing by double-digits in the near-term, amounting to a boost of about $2 billion this year. “We are growing our investment into our transition and, at the same time, growing investment into today’s energy system,” said CEO Bernard Looney.

The message that it’s time to invest more in the business goes against the grain of the industry, which has instead curbed its capital expenditures and sent a growing share of profit back to shareholders in the form of dividends and buybacks. Those shareholder-returns have tended to impress investors.
Chevron
rose last month after it announced a $75 billion buyback plan.

BP is also boosting its dividend and buybacks, but the central message of its new outlook is that the world is now running short of investments in both fossil fuels and clean energy, and it’s time to spend more heavily. Wall Street likes the message—the stock was up 8.4% on Tuesday. Barron’s highlighted BP as a potential winner from the energy transition last year.

“This feels, to us, an important moment for the oil-and-gas industry,” wrote
Citi
analyst Alastair Syme. “The last few years have been a single-minded market focus on returns to shareholders which, while fulfilling gratification, was starting to raise the specter of under investment.”

BP’s capital expenditures next year are likely to be about 16% above this year’s levels, Syme says. In total BP says it will invest about $8 billion more in fossil fuels than it had previously expected between now and 2030, and $8 billion more in clean energy too. That amounts to about $1 billion a year in new spending on each. 

Some analysts say that the world has entered a new energy supercycle of fast-rising demand, similar to what happened when China’s growth took off after 2000. Emerging markets are using more fossil fuels and China is likely to use more too as it emerges from Covid restrictions.
JP Morgan
analyst Christyan Malek wrote last year that demand growth is on track to exceed supply growth for all types of energy by 20% by 2030. To meet demand, energy spending will have to rise fast.

“In order to address this mismatch of demand and supply, a significant amount of incremental capital ($1.3 trillion) will need to be employed toward expanding capacity and the delivery of this energy to the end user,” Malek wrote.

Others disagree, saying that demand growth isn’t quite strong enough to call it a supercycle. If oil was in a supercycle, OPEC wouldn’t still be holding back some of its supply, as it’s doing today, says Dave Ernsberger, head of market reporting and trading solutions at S&P Global Commodity Insights.

That said, BP’s continued investment in fossil fuels indicates that it sees demand and prices continuing to be strong, at least over the next few years. The company is particularly focused on “short-cycle fast-payback opportunities,” such as production in the Gulf of Mexico, where it already has considerable operations. The company’s total 2030 production of oil and gas will still be around 25% below 2019, but not the 40% reduction the company had previously projected.

Tuesday’s announcement also attempts to persuade investors that BP will sharpen its focus within clean energy. The company said that it will ramp up investments in areas like biofuels, where it expects to earn returns of around 15%, better than most other clean-energy industries. It’s also looking to profit by selling products where there’s clear demand now. “We will increase our focus on the transition growth engines able to deliver nearer-term solutions—like EV chargers and sustainable aviation fuels—that can help people and businesses decarbonize sooner,” said Looney.

BP will keep investing in renewables like wind and solar, but it is less focused on putting money into those technologies unless it starts to see a larger payoff. Right now, returns are trending toward 6% to 8% in those areas, as they face higher input costs and more competition. To boost those returns, BP says it wants to “integrate” renewable power into other businesses. That could mean using wind energy to make clean hydrogen, which could qualify it for extra government subsidies or fetch higher prices from buyers looking to decarbonize.

All told, BP now expects its earnings before interest, taxes, depreciation, and amortization, or Ebitda, to reach $46 to 49 billion by 2025, up from its earlier projection of $38 billion. Some of that comes from a change in assumptions—BP now expects oil prices to average $70 a barrel in that period, up from earlier expectations of $60. But some of it clearly comes from the company’s expectations for a longer period of growth in energy needs and investment—what some call a supercycle.

Write to Avi Salzman at avi.salzman@barrons.com