BP shares were still looking subdued heading into Tuesday’s results as the market brooded over whether the oil giant would pay a dividend. But we see this as just part of a bigger battle on the part of BP and the rest of the energy majors to reinvent themselves post-COVID into companies that can still play a role in the future energy economy.
Oil companies that stand still or expect to rely on the oil price to prop them up, may be in for a shock. BP looks to use like it is starting to take evasive maneuvers, to whit its disposal to Ineos of BP’s petrochemicals business last month. The sale to Ineos meant that BP would hits its disposal target a year early and help to strengthen the BP balance sheet, as gearing has risen due to recent asset impairments.
Under the terms of the agreement, Ineos agreed to pay a deposit of $400m and will pay a further $3.6bn upon completion. An additional $1bn was deferred and will be paid in three instalments in March, April and May of next year, the companies confirmed. The remaining $700m will be paid at the end of June 2021.
BP is under new leadership, and CEO Bernard Looey has embarked on a restructuring program about which we hope to hear more tomorrow. He seems to be re-focusing BP away from its traditional oil business during the current crisis, when ironically investors will be a little more forgiving due to macro factors like to oil price.
“We continue to believe that the best way to play the oil sector is through the integrated names which have relatively strong balance sheets, better diversified operations and lower costs of production than others in the space,” remarked Mark Nelson, an analyst at Killik & Co. “We believe that rising costs of capital to the sector could create barriers to entry from which the strongest names could benefit, while the integrated stocks are best placed to transition their business from big oil to big energy companies.”
Killik said it was maintaining a buy rating on BP shares. BP’s share price has been struggling since the stock was crashed with many others during the first wave of the coronavirus pandemic spread in March. It recovered to trade in the area of GBX 330-350 with a brief peak at 362 in the first week of June. However, most investors seem to be sitting on their hands with this one, and some are obsessing with dividends, as oil stocks have traditionally been a source of yield.
We will be looking to hear more from BP about future activities, as yes, the oil price will recover, and yes, it will start paying dividends again. Of more concern to us will be how it intends to remain viable as the world transitions towards an economy that is not being powered by fossil fuels. According to Christian Malek of JPMorgan’s oil and gas desk, we may not hear about this until September, but BP needs to produce a coherent plan, and soon.