I never thought I'd hear a big oil CEO come right out and say that oil is a terrible investment -- but that's practically what BP's (BP 1.58%) Bernard Looney said in the energy supermajor's second-quarter earnings report on Aug 4.
He made other big announcements at the time, too, revealing that BP was cutting its dividend in half and that the company had a net loss of $16.8 billion in the quarter. Although those points were the ones that made the headlines -- even here at the Fool -- the company's shift away from oil will likely have the biggest impact on its shareholders over the long term.
Here's what investors need to know from the earnings report.
Image source: Getty Images.
By the numbers
| Metric | Q2 2020 | Q1 2020 | Q2 2019 | Change (YOY*) |
|---|---|---|---|---|
| Revenue | $31.7 billion | $59.7 billion | $72.7 billion | (56.4%) |
| Net Income | ($16.8 billion) | ($4.4 billion) | $1.8 billion | N/A |
| Total Production** | 2.53 million BOE/d | 2.58 million BOE/d | 2.63 million BOE/d | (3.8%) |
| Total Debt | $76 billion | $69.1 billion | $67.6 billion | 12.4% |
*YOY = year over year. Total production includes natural gas, oil, and other liquids, measured in barrels of oil equivalent per day (BOE/d). Data source: BP. Chart by author.
The numbers were objectively awful, and everybody knew they were going to be. Between the crude price crash in March and the COVID-19 pandemic, demand for oil and oil products is way down, supply is too high, and crude and fuel prices are too low for BP to turn a profit.
It's worth noting that although BP's total production declined, its production of liquids (a category that's primarily oil for the company, but also includes bitumen and natural gas liquids) rose 5% year over year to 1.37 million barrels per day. But boosting oil production doesn't help when you aren't turning a profit on the oil you pump.
So BP decided to do a reset.
Money where your mouth is
To be fair, BP has one of the stronger records among big oil companies when it comes to adding clean energy to its portfolio.
A year ago, then-CEO Bob Dudley spent more time during the company's Q2 2019 earnings call talking about its green energy investments than he did talking about the entire rest of the company. BP's shareholders had just passed a near-unanimous resolution demanding a clear strategy to combat climate change. Dudley responded on the call by citing the $500 million BP invested in renewable energy each year.
Dudley's successor Looney just made that investment look like small potatoes. By 2030, Looney expects BP to be investing around $5 billion a year in low-carbon energy sources, while reducing its overall carbon emissions by 30% to 35%, with a goal of being a net-zero carbon emitter by 2050. Meanwhile, the company plans to cut its hydrocarbon (oil and gas) investments by 40% by 2030, and won't do any oil or gas exploration in countries where it doesn't already have a presence.
Looney was frank about what this meant on the earnings call. "[T]his will result in lower production and refining throughput over time, while increasing our focus on value, not volume," he said. Considering that increasing production is almost universally thought of as sound strategy for oil companies, that's a pretty bold statement.
If you can't beat 'em, join 'em
Management expects this new framework to generate superior returns compared to the company's former strategy of boosting production by any means necessary. While BP hasn't put out any hard projections, it expects to be able to maintain its new, lower dividend, start paying down debt to maintain an investment-grade credit rating, and -- once debt has been cut significantly -- to begin rewarding shareholders through stock buybacks, all while reducing expenses.
This plan seems doable. BP's exploration expenses will fall drastically -- possibly even to zero -- in the medium term, since it won't need to find new oil deposits to replace depleted wells. It will allow the company to sell off its least-profitable oil and gas assets while focusing on the wells generating the highest margins.
Another benefit to the strategy, to be frank, is that it makes BP less of an oil company and more of a renewable energy company. Looking at the recent performance of some of the biggest companies in these spaces, it's clear which industry is winning right now.
BP Year-to-Date Performance, data by YCharts.
Renewables companies NextEra Energy and Brookfield Renewable Partners are handily outperforming the oil companies, and it's not even close.
The best of both worlds
It's not every day that a company suddenly announces it's changing its focus from one sector to another. Often, such things happen gradually and organically, as one business line grows and others contract. BP investors -- and potential investors -- now need to decide whether they want to own stock in a diversified energy company, or switch to a pure-play oil-and-gas company instead.
I expect BP's renewable energy business to grow even as oil and gas businesses continue to stagnate, which should be a net positive for the company. However, it will take time for BP to build its planned 50 GW of power-generation facilities and make other changes to its portfolio. Even after the dividend cut, though, BP will be yielding about 5.5% at current prices. That's a better yield than renewable powerhouses Brookfield Renewable Partners and NextEra, which are yielding 4% and 2%, respectively, giving investors an incentive to jump in now.
