LONDON (Reuters Breakingviews) - Bernard Looney’s overhaul of BP is gaining credibility. The UK oil major’s new chief executive on Monday said the company would take charges worth up to $17.5 billion against second-quarter earnings after slashing long-term assumptions about crude and natural gas prices. But his greener look also amplifies the dilemma about BP’s generous dividend.
Looney’s latest move should reassure observers who worry BP’s efforts to substantially cut carbon emissions, outlined in February, are hot air. By 2030 the group’s balance sheet will assume carbon dioxide is priced at $100 a tonne, up from just $40 today. That’s more consistent with global efforts to cut emissions to net zero by 2050. Lowering the expected future price of a barrel of oil from over $70 to $55 is also more credible given that the black stuff currently trades at less than $40.
BP’s $274 billion balance sheet can probably handle the damage. Shrunken assets could push already-high net debt towards 40% of total capital. But the ratings agencies that determine BP’s investment-grade credit status are more concerned with the company’s cash flow.
Even so, Looney’s urgent approach to the transition away from fossil fuels, and his recent call to lay off 15% of the company’s 70,000 employees, sharpen the focus on BP’s dividend, which Jefferies estimates will cost over $8 billion in 2020. Rival Royal Dutch Shell’s, decision in April to cut its payout by two-thirds was partly received as a way to free up financial resources for lower-carbon investments. The 9% dividend yield on BP shares suggests investors expect Looney will also give himself more headroom.
The catch is that Shell has been getting heat from investors who can’t tell for sure whether it reduced the dividend to embrace the energy transition, to cover up avoidable strategic mistakes, or to reflect permanently lower oil demand as a result of Covid-19. Some shareholders think it’s just as likely that the pandemic will encourage more people into their cars, pushing up fuel consumption, and oil prices.
BP’s $30-odd billion of cash and available borrowing facilities allow it to maintain the dividend for now. At the same time, however, Looney’s lower price forecasts will restrict the company’s investments in new oil projects. Looney’s choice may be between annoying shareholders today, or in the future.
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