BP share price: where next amid net-zero ambition?

BP is under new management and embarking on a 30-year transformation to get the company to net zero, but what does it mean for investors?

The oil market was already suffering from a supply glut as it entered the new year and that has now been compounded by the collapse in demand caused by the coronavirus pandemic. This has placed unprecedented pressure on prices, with WTI slipping into negative territory for the first time in history in April while Brent dropped to its lowest level since 2003.

In response, Big Oil is doing what it always does. Most players find they are too large and bloated when a period of lower prices comes around, and it is remarkable how many savings and inefficiencies can be found when they are needed.

Jobs are being cut and spending is being slashed as the industry bunkers down for the latest crisis, but some have realised that this downturn is unlike any other before and will leave a permanent scar on the oil market.

Read more: What is the impact of the coronavirus and how can you trade it?

BP's new chief executive Bernard Looney has warned the coronavirus could change how the world works and how it is powered, and has even dared say it could usher in the period of peak oil – when supply reaches its limits – much sooner than we think. ‘Could it be peak oil? Possibly. Possibly. I would not write that off,’ he told the Financial Times in May. Before the virus emerged, BP was expecting solid growth in global oil output over the next decade before starting to peak sometime in the 2030s.

Looney has wasted no time in stamping his authority on BP since taking over earlier this year, having overhauled management and unveiled a 30-year transformation plan that will turn BP from an oil and gas giant to a net-zero energy provider.

BP wants to lead from the front and address the role that Big Oil plays in a world striving for cleaner energy, but it will not be cheap or easy. BP is determined to ‘perform and transform’ – but it may have to suffer some short-term pain in the hope of long-term gains.

BP is under new management

Looney took over at the helm of BP as chief executive officer (CEO) in February, bringing in a new era for the business after almost a decade being run by Bob Dudley. Looney originally joined BP in 1991 and has worked his way up the ladder. He was the head of exploration and production before taking the hot seat and understands the company more than any outsider ever could.

BP’s chief financial officer (CFO) Brian Gilvary is leaving the company in June and is being replaced by the CFO of the upstream business that produces oil and gas, Murray Auchincloss. Considering Helge Lund, the chairman and third key member of the board, only joined in 2018 and oversaw the change in leadership shows that BP is firmly under new management, albeit one very familiar with how the company operates.

While Dudley and his team – which included Looney – had to battle against the likes of the Deepwater Horizon oil spill and the 2014 downturn in the oil market, the challenges facing the new board are very different.

Reimagining BP: aiming to be net zero by 2050

Looney unveiled a huge ambition for BP only weeks after becoming CEO to get BP to ‘become a net-zero company by 2050 or sooner and to help the world get to net zero.’

Oil and gas are vital to not only producing the energy we need but in making an array of products, many of which are used on a daily basis. Still, fossil fuels are among the biggest contributors to climate change. BP alone accounts for 415 million tonnes of carbon dioxide equivalent each year.

‘This is what we mean by making BP net zero. It directly addresses all the carbon we get out of the ground as well as all the greenhouse gases we emit from our operations. These will be absolute reductions, which is what the world needs,’ said Looney.

It is a huge task to bring those emissions down to net zero. For perspective, the average British person emits just under ten tonnes of CO2 per year, according to Carbon Independent.

BP plans to halve the intensity of both carbon and methane in its products – and, most importantly, leave some of the oil and gas it planned to produce in the ground. It also plans to begin advocating for ‘policies that support net zero, including carbon pricing’ and introduce more transparent reporting on its carbon footprint.

BP’s structure will have to be overhauled to reflect the drastic changes being made. The age-old model of upstream (production) and downstream (refining) is to be replaced by four new divisions; production & operations, customer & products, gas & low carbon, and innovation & engineering. These will be supported by a number of smaller units.

The shift away from oil and gas

The main element of the plan is to gradually move BP away from the oil and gas on which it built its name and into cleaner and more sustainable forms of energy provision. ‘We expect to invest more in low carbon businesses - and less in oil and gas - over time. The goal is to invest wisely, into businesses where we can add value, develop at scale, and deliver competitive returns.’ Looney said.

BP and its peers have been increasing the amount invested in clean forms of energy like solar and wind over the years, but these are still dwarfed by the staggering sums spent on new oil and gas projects and exploration.

BP invested just $500 million in low carbon activities last year, compared to its $15 billion budget for oil and gas. Last year, its biggest low carbon investments were made into its European solar arm, Lightsource BP, and a new biofuels venture in Brazil.

To a degree, BP no longer cares what assets it has considering they generate returns. The small steps it has already made show how BP is diversifying in any way that seems sensible and is showing that it doesn’t necessarily have to produce energy.

It has launched a joint venture to supply electric charging stations in China, invested in a carbon capture project in Australia, and launched new businesses striving to do everything from improving the productivity of oil wells, to maintaining wind farms.

This resembles what is known as the ‘pick and shovel’ approach, when a company supplies vital services to the industry rather than being responsible for the final output. For example, a chipmaker is a pick and shovel play for the smartphone market, as building materials is to construction.

BP wants to become less concerned with producing energy (although it will still do this) and focus more on becoming a crucial partner for the wider industry as it transitions to cleaner energy. While there is no immediate threat, oilfield services companies – the traditional pick and shovel play in the oil industry - might be starting to feel unnerved.

Why is BP taking such radical action, and why now?

There are a number of reasons why BP has decided to take such radical action. While it may not seem like the best time considering we are in the middle of a pandemic, BP sees it as all the more reason to push ahead with its new strategy.

The first is the imbalance between demand and supply, and the long-term affects coronavirus will have. BP ‘sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period’ and that the ‘economic impact of the Covid-19 pandemic coupled with pre-existing supply and demand factors have resulted in an exceptionally challenged commodity environment’.

It has warned it could cut global oil demand by as much as 40% this year alone. BP increasingly believes demand will remain lower for longer going forward, and fears this even more, considering there is still too much supply in the market. This is why it feels the need to move away from oil and gas, albeit over decades rather than years, as it believes the situation is only going to get worse.

Plus, BP believes the world’s energy needs will be fundamentally different even when things get back to normal and the coronavirus is gone. BP said it has ‘a growing expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system, as countries seek to 'build back better' so that their economies will be more resilient in the future.’

That means it thinks governments will be investing less in fossil fuels and more in renewable and other forms of low carbon energy once the pandemic is over and growth returns – and BP wants to be in the funnel where the money is growing rather than the one that will slowly drain.

Furthermore, BP has been in the crosshairs of investors and activists that want the company to make these drastic changes for years. Its annual general meeting last year saw investors back a resolution to introduce better transparency of climate emissions, and the company is finally starting to listen.

With all that in mind, BP considers ploughing ahead with its existing strategy built around fossil fuels would simply be delaying the inevitable. It has been the first oil major to make such a bold statement and it will be hoping that this will place pressure on its rivals to follow suit and, if they don’t, that this will play into its hands over the long term.

Plus, the pandemic could provide the cover BP needs. Results and balance sheets are already being battered by the virus, so this will help mask any unwelcome figures that BP posts in the short term related to its plan. It is better to do it now during a crisis than wait and unveil such drastic change once it is all over, when it will be much further under the spotlight.

Short-term pain for long-term gain?

The long-term impacts of the coronavirus on the market means BP has had to revise its price forecasts for oil over the coming years. BP believes the effects will be significant. It now expects Brent to average at around $55 per barrel between 2021 and 2050, considerably lower than its previous assumption of around $75 before the crisis.

This has a huge impact as it goes a long way in valuing the company’s assets and potential. BP has already warned it will book between $13 billion to $17.5 billion in impairments in the second quarter of 2020 after writing down the value of its assets to take the new price forecasts into account.

This is unlikely to be the last of the large write-downs, not just for BP but the wider industry. Lower oil prices mean many projects will no longer be profitable. Those oil wells with higher breakeven points are no longer economical, and therefore their value is also lost so long as prices remain low and the cost of extraction remains high.

BP’s dividend: can it perform and transform?

BP’s transformation programme does give it a major headache. It could completely change the investment proposition of BP, and leaves the company straddled between two very distinct set of shareholders. Right now, most of those that have invested in BP have done so because of its dividend payments and it is popular among pension providers, but BP knows that the younger generation of investors want to see the company move to a more sustainable future.

BP is trying to appease both parties by transforming while maintaining cashflow and dividends, but there is good reason to think it will struggle. The dividend, and its safety, has been and will continue to be the main measure of performance for many investors, but others will want to see BP making material changes. The question is, can BP afford to do both?

‘We can only reimagine energy if we are financially strong, able to pay the dividend our owners depend on and to generate the cash to invest in new low and no-carbon businesses,’ said Looney.

BP seems determined to maintain payouts despite the tumultuous situation it finds itself in. Payouts amounted to $8.4 billion last year, and many will argue that those sums would be better directed toward investing in this new and sustainable future, rather than simply dishing out cash to investors.

Royal Dutch Shell (Shell) – BP’s biggest rival in the London market – cut and rebased its dividend for the first time since World War Two at the end of April, blaming the coronavirus pandemic.

Shell is making greener changes to its business, but doesn’t have a grand plan to finance like BP, and it has considerably less debt. Shell ended March 2020 with gearing of just under 30% - at the top end of the desired 20% to 30% range, while BP’s sat at over 36%.

Still, Shell has felt it necessary to cut dividends while BP somehow believes they are sustainable. That will be acutely felt by the 10,000 people, representing about 15% of BP’s workforce, that will have lost their jobs by the end of this year.

It was reported that Looney wrote a letter to staff bluntly outlining that ‘we are spending much, much more than we make’. BP spent just under $7.5 billion on wages and salaries last year, slightly less than what it paid out in dividends.

BP has tried to cut the fat. Its spending budget this year has been reduced to $12 billion from $15 billion. The exploration budget has been given a $2.5 billion trim compared to last year, and costs are being cut across the business, but it has still had to take further action to shore up its balance sheet.

Despite its already heavy debt load, BP has raised $12 billion in debt this year, and secured billions more from its lenders. It says it has $32 billion of liquidity to survive with and that it is trying to cut its breakeven price to $35 per barrel from $55, which would make it more profitable in the current climate.

Notably, the quickest way to cut its breakeven price, especially if it needed to go beyond that $35 target, would be to cut the dividend. Looney has said the dividend is being reviewed on a quarterly basis.

One thing that does go in favour of BP’s dividend is its asset disposals, as the money it is raising from selling off projects is going toward reducing debt, which frees up more funds for investment or payouts.

BP was already working toward a target of selling $10 billion worth of assets by the end of 2020, having raised $9.4 billion so far, but it has since said it will sell another $5 billion worth by the middle of 2021.

However, appetite in the market has dropped considerably since the coronavirus came around, with BP having sold just $700 million worth of assets in the most recent quarter. BP has said asset sales could slow over the near term, which could cut off a vital supply of funds.

One possibility for BP and its peers desperate to maintain shareholder returns is to reinstate scrip dividends, which allow investors to take dividends in the form of new shares in the company rather than cash. This means BP doesn’t have to physically pay as much out to shareholders. BP suspended its scrip dividend in the third quarter of 2019 and said it didn’t intend to reinstate it for the ‘foreseeable future’ – although much has changed since then.

BP admits that prices will be lower for longer, and there are questions about how BP will pay for everything. If it reduces investment in oil and gas, will its new investments be able to drive cashflow in the same way? Furthermore, how will it balance the need to invest in its new plan and future growth against the commitment to the dividend?

What is the next trigger moment for BP shares?

BP has outlined its plan, but details are still thin on the ground. It intends to reveal more at a capital markets day in September, when investors will be able to properly judge BP’s strategy and prospects. It will be a big day for the company considering it is launching a strategy that is supposed to last for 30 years, with investors focused on what will happen over the next five to begin with.

However, BP is due to release its next set of quarterly results covering the second quarter of 2020 on 4 August, and investors will be hoping to gain some insight then.

How to trade BP shares

In the meantime, the price of oil will remain the key driver of oil stocks, which will be hoping for demand to return in the latter half of this year as lockdown measures are eased. However, the uncertain outlook and risks of a second wave of infections being triggered means it could be a very volatile year for the industry.

Built on the hope of higher prices, 97% of IG clients with an open position on BP as of 19 June were long and expect BP shares to rise, and brokers are also bullish on the stock. It currently has an average rating of 'Hold', although this is on the cusp of being rated a 'Buy'. The average target price on BP is 383.57p, implying there could be up to 19% upside to the current share price.

With IG, you can trade on the best trading platform and back whether you think BP shares will rise or fall in value. Go long (buy) if you think they will increase in value, or go short (sell) if you think they will decrease in value.

To take a position, follow these simple steps:

  1. Create an IG trading account or Open My IG to your existing account
  2. Type ‘BP’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

Read more on how to trade volatility

You can also buy and hold UK shares from just £3 with IG’s share dealing service.

BP share price: will short-term pain yield long-term gain?

BP is under new management which believes the coronavirus crisis will bring forward peak oil and result in overall lower demand over the long term. It intends to lead from the front and become the first oil major to make the push to a greener and more sustainable future, but so far it has not let anything give and is promising everything to everyone.

But the activists that are pushing for change remain unconvinced. Greenpeace have already voiced their disappointment and stressed for a more detailed timeline of how BP will transition. There has also been calls for BP to include the oil and gas it trades on behalf of third parties in its net-zero plans.

BP trades more barrels than it produces, so it will make a huge difference as to whether this is part of the plan or not. Still, some may argue that BP will not be able to appease everyone as many don’t want to bring change to BP, but to close it down completely.

On the other hand, shareholders are concerned that this new era of investment, coupled with lower oil prices for longer, will bring an end to BP’s reliable dividends. BP needs to fund its new ventures when cashflow is already under strain, and some rightly question how the dividend can be sustained, especially when BP’s debt is racking up.

Read more: How to trade oil

BP recognises these challenges, it just hasn’t addressed them all yet and we can expect further news and surprises as 2020 develops. The current strategy ends in 2021, so BP is right to bide its time and see what other shocks are in store for the world this year, especially if it will dictate the company’s direction for the next three decades.

BP is the first oil major to take such drastic action, but it is not the first to try and reinvent itself. Shell is transitioning to an electricity company over the next decade while Danish firm Orsted has moved toward wind farms. It is possible to transform Big Oil, but it doesn’t come without its costs and risks.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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