BP profits bounce back but investors may remain sceptical about its transformation

It is now more than a year since Bernard Looney, the then-new chief executive of BP, unveiled what was seen at the time as the most ambitious energy transition programme to be announced by one of the supermajor oil and gas companies.

He followed that in June with a clear statement that the new strategy would mean BP would be leaving in the ground some oil and gas that it had originally planned to extract.

Since then, the company has invested heavily in a range of low-carbon energy projects, which has accelerated in recent months.

In the first three months of this year alone, BP has invested in a $1.1bn US offshore wind project in partnership with the Norwegian giant Equinor and a near-£1bn bid to develop two offshore wind projects in the Irish Sea in partnership with Energie Baden-Wuerttemberg of Germany.

It is also investing heavily in the UK’s biggest “blue” hydrogen facility on Teesside and in BP Pulse, its electric vehicle charging network.

It is fair to say the market was sceptical.

BP is seeking profitably to transition away from fossil fuels and turn itself into an integrated energy company which, while still producing hydrocarbons, will be increasingly focused on low-carbon electricity and energy solutions.

Some shareholders fret that the projects in which BP is now investing will not deliver the same financial returns as its traditional activities.

This debate around BP’s future has come during the worst 12 months in memory for the oil and gas industry which, at one point last year, saw the oil price actually turn negative.

BP made a loss in 2020 for the first time since the Deepwater Horizon disaster in the Gulf of Mexico a decade ago and has since cut its dividend.

All of which makes today’s first quarter results from the company all the more important.

BP reported underlying replacement cost profit – the most common industry measure – of $2.6bn for the first three months of the year.

That was up from $791m in the same period in 2020 and comfortably ahead of the $1.6bn the market had expected.

That was not the only good news today.

BP had previously announced a target of reducing its net debt, a cause of concern to many investors, to $35bn by the end of the year.

Today it said that, during the first quarter alone, net debt fell by $5.6bn to $33.3bn thanks to asset sales and stronger cash flow.

Accordingly, the company plans to resume share buy-backs, which are preferred by some investors to a return of capital via dividend increases.

For Mr Looney, the results were proof that BP can confound the sceptics and deliver returns to shareholders while transitioning away from hydrocarbons.

He told Sky News: “I think the interesting thing – and I’m very glad we did what we did 12 months ago – is that society and the world has moved towards us, rather than away from us, over the past 12 months.

“And that just continues to happen each and every day, whether it’s the US re-joining [the] Paris [climate change agreement] and then ratcheting up its NDC [nationally determined contributions] ambitions just last week; whether it’s China coming out with a [carbon neutrality] target; this is going one direction and one direction only.

“And then the past 12 months, because of the ambition that we laid out, the world’s coming together towards our strategy rather than further away from it.

“What investors have questioned is, can we deliver competitive cash returns to them while at the same time transitioning the company? And that’s a very fair question.

“Today’s results, I hope really put that point to bed – we are delivering competitive cash returns – $18bn net reduction in net debt means that we can now start our buyback programme, $500m in the second quarter.

“And at the same time, over the coming years, we believe we can get those distributions back to the pre-pandemic levels in a moderate price environment.

“At the same time, we’re making progress on that strategy.

“So the question isn’t is one [strategy] right or one wrong – it’s can you do both at the same time?

“I think today’s results prove that we can.”

That remains to be seen.

Some investors, not to mention industry executives, still fret about the price of the transition.

BP was accused of over-paying for the Irish Sea offshore licences it recently acquired.

Patrick Pouyanne, the chief executive of BP’s French peer Total, told the Financial Times in February this year that there was a “bubble” in the renewables sector with buyers of such assets paying prices that were “just crazy today”.

But Mr Looney insisted that BP had not overpaid for the Irish Sea licences.

He added: “I’m not going to comment on what others do. All I can do is look at what we do ourselves.

“And you know, the more I learn about this part of the industry, the more convinced I am that we have a lot to add to deliver the sort of promises that we’ve made our investors of 8-10% returns.

“These [wind farm licences] are 60-year leases – a lifetime of 60 years. This is stable cash flow for generations in many, many regards.

“And we can bring all of the experience that we’ve learned in the offshore hydrocarbon business and apply them to the offshore wind business.

“We can use our supply chain organisation that we built up here in the UK over decades.

“And importantly, as we look at hydrogen on the east coast [of England] we can take that wind power and use it to maybe power the hydrogen facility.

“We have BP Pulse…which is, I think, the largest charging electric vehicle charging business here in the UK.

“We can use the electrons generated by the offshore wind to power our own charging business.

“So when you look at it in the round, it really is what we call an integrated energy company strategy in action.”

Critics will argue today’s results were flattered by the recent rally in oil and gas prices.

Brent crude traded at an average $61.12 during the quarter compared with $50.10 during the same period a year ago.

Nonetheless shares of BP, which fell by 46% during 2020 and have underperformed those of most of their peers during the last year, still rose by 3.5% at one point today.

Stability in oil prices at or around their current level – of which Mr Looney is hopeful – in coming months will provide a helpful tailwind and especially because, due largely to asset sales, BP’s oil and gas production is set to continue falling this year.

In conclusion, today’s results saw BP go some way towards answering its critics, but the company may continue to polarise opinions among investors for a while yet.

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