It wasn't that long ago that BP (NYSE:BP) was said to be ushering in a new kind of energy company. It was creating a diversified giant focused on both fossil fuels and renewables. Fast forward a couple years and now BP is completely exiting the renewable energy sector.
In a continuation of its recent asset sales, BP announced that it is putting its wind business on the auction block. The sale includes interests in 16 operating wind farms with total capacity of about 2,600 megawatts. The company hopes the sale will generate $3.1 billion which it can use to reinvest in high-margin oil and gas projects. This sale comes on the heels of exiting its solar business in December 2011 and reverses what had been a creative plan to build a diversified energy company.
The shale oil boom in the U.S. along with a worldwide reduction in renewable subsidies has really clouded that industry's future. Given limited visibility for wind beyond 2014, when current U.S. tax credits expire, it makes sense for the company to exit the business ahead of that time.
Despite those headwinds, the wind business had been growing briskly -- last year, BP's capacity grew 50%. The company feels that it is simply prudent to unlock the value of its wind assets now given that it could never build enough scale to really move the needle.
For the right owner, wind assets represent a solid path to investor returns. NextEra Energy (NYSE:NEE), for example, just installed its 10,000th megawatt of wind-generating capacity. Its wind business has really been a driving force in propelling its shares higher in recent years.
That's why it wouldn't surprise me if NextEra or even Exelon (NYSE:EXC) emerge as the winning bidder for BP's wind assets. Exelon is very reliant on nuclear power and recently cut its dividend because the company is not generating a high enough return to support it. The other factor behind the cut is that the company wanted to maintain its investment-grade credit rating so that it could participate in attractive opportunities. The BP assets certainly represent a compelling opportunity given size of the generating portfolio.
That being said, BP's proposed sale of its wind assets shows that it has little confidence in renewable energy. The company can generate much higher returns from fossil fuels and it needs all the returns it can muster after forking over billions of dollars to pay for the Gulf of Mexico disaster. Given the company's strategy to generate 50% more annual cash flow by 2014, it make sense to part with an asset that no longer had the potential to develop into a core business for the company.