BP [LON:BP] was half-way through a major strategic overhaul of its business, the biggest in its history. The strategy included 10,000 job cuts and a $25 billion programme of divestments (including the sale of its prestigious headquarters building in central London), all as part of a commitment to have 50 gigawatts of renewables capacity by 2030 and be net zero by 2050. Then the Covid pandemic struck.
BP’s green strategy was already ambitious, but it could not have taken account of the global slump in oil demand that followed, resulting in huge losses. So where has that left BP?
BP shares closed last week on 275.25p, which is 39.32% down on a year ago, though the past three months have seen an upturn of 8.58%. With a weak balance sheet, a $40.4bn debt pile and little prospect of a return to the days of $100/barrel, BP is not profitable and is not looking like an exciting investment.
Will BP cut its dividends again in 2021?
Investors like BP for its a long and stable history of paying dividends, but this year they were halved, from 10.5p to 5.25p, for the first time since the 2010 Deepwater Horizon oil spill, dropping the dividend yield from 7.8% to 5.77%. CEO Bernard Looney has committed to paying dividends at 5.25p per quarter, but a lack of profitability leaves the door open to a second cut.
Earnings are forecast to grow by almost 70% and revenues by 11.5%, reflecting the more positive market outlook. JP Morgan analysts are already talking up prospects of an ‘oil supercycle’, thanks to a likely rebound in the global economy. Demand growth, in particular from key markets such as China and India, and the OPEC+ decision to continue restricting supply, for now have all contributed to a measured recovery in the oil price.
The global economic slump has left BP with little room for manoeuvre. Brent oil is currently at $41/barrel, just below BP’s breakeven price of $42/barrel. Analysts are forecasting $50/barrel late in 2021, a long way off the highs of $100 of yesteryear.
Long term oil price forecasts: are they realistic?
The oil majors have had to cut long-term price assumptions for oil from $70 a barrel to $55. In a September report, BP questioned whether oil consumption would ever return to pre-Covid levels, against the prevailing industry view that growth in demand for oil and gas will continue for decades yet.
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The pandemic crisis, despite the damage it has caused to the global economy, has in fact proved to be an opportunity for BP to rethink its dividend policies, reduce debt and to push ahead with its plans for a low carbon energy future. However, a question remains over the potential effects of BP’s renewables policy on its profits and dividends. A commitment to renewables will require further investment, which in turn may mean selling off more assets, shrinking its balance sheet. Already this year, BP has had to write down $17.5 billion of the value of its assets.
The other question is whether investors can expect the same steady, reliable income stream from the future low-carbon BP as from the old one. Only time will tell.