MIDAS SHARE TIPS: BP’s green future is a bright prospect – but only for the bravest investors
It is not a good time to be Big Oil. Your share price is at the mercy of everything from teenage climate activist Greta Thunberg to the action of foreign governments.
And thanks to those shiny turbines springing up everywhere, it is easy to see which way the wind is blowing.
What’s a beleaguered energy giant to do when its shareholders demand growing dividends from oil and gas production, but the activists are chaining themselves to railings?
In a spin: BP is investing in renewables after criticism from Greta Thunberg (above right)
In the case of BP last week, the answer was to take a bold stand. New chief executive Bernard Looney promised the company’s carbon footprint will be ‘net zero’ by 2050 or sooner, while continuing to reassure investors that the company is committed to growing its dividends.
It is an attempt to placate everyone after too little of that over the past few years.
Former boss Bob Dudley did his best to tow the BP supertanker out of the reputational doldrums after the 2010 Deepwater Horizon oil rig disaster in the Gulf of Mexico, as well as accidents in Texas and Alaska.
He made some progress in the biofuel, solar and wind sectors, but it’s hard to ignore the fact that the company is also currently committed to expanding its oil and gas production by 20 per cent over the next ten years.
Looney has limited room for manoeuvre, whatever his good intentions, because environmental activists are not the only ones he has to answer to.
BP shares, which closed on Friday at £4.57, are barely higher than they were five years ago, despite this month’s good news on fourth quarter profits and a boost to the company’s dividend.
BP has $45billion (£35billion) in debt to service and $6.5billion of dividends to pay out each year – and it has made big promises to its investors about decreasing its debt and increasing its dividends still further.
‘It is going to cost billions for BP to reposition itself in solar, wind and renewable power generation and transmission,’ says Russell Mould, investment director at stockbroker AJ Bell.
‘This does not sit entirely comfortably alongside Looney’s reaffirmation that BP will continue to stick to its existing financial targets.’
Not everyone shares Mould’s pessimism. Analysts at both HSBC and UBS reiterated their ‘buy’ stance on BP after his statements last week, though HSBC cut its price target for the stock from £6 to £5.95 after mulling the cost of Looney’s new strategy.
The consensus forecast from analysts is that BP is a ‘buy’.
For those hungry for income, Looney’s affirmation that dividends are still important will be welcome. The company’s current dividend yield is 7 per cent, making it attractive in its current form to those looking for income.
Mould cautions that a dividend cut would be one way for the company to achieve its environmental aspirations. Such a move would make Looney very unpopular with shareholders, however much they care about the company going green.
MIDAS VERDICT: Bumper dividends and a recent strengthening in company results are two reasons to buy the shares.
But any recommendation has to be a cautious one during a time when Looney’s words are properly weighed and more is revealed about BP’s environmental plans.
It is not yet clear whether Looney’s aspiration to be ‘net zero’ is a sensible, realistic and considered response to pressure from investors.
Those who want to go along for the ride would be advised to study very carefully what Looney said last week – as well as his words over the coming months – to see whether they understand how he will reconcile the twin aims of pleasing shareholders and the public at the same time.
Looney is trying to have his cake and eat it, so only the bravest investors who are prepared to hold for the long-term should consider coming to this particular tea party.
Traded on: Main market Ticker: BP Contact: 020 7496 4000 or bp.com