Beyond Petroleum - BP halves dividends after record loss and unveils new environmental strategy
Friday 7th August 2020
For the first time in a decade, BP has announced a 50 per cent cut on dividends - the share of profit distributed to shareholders in a company - following a tough quarter for the oil industry amidst the coronavirus pandemic. CEO Bernard Looney also unveiled a new strategy to transform the company into a zero emissions company by 2050, resulting in a 6.26 per cent increase in share price.
A tough second quarter left BP with an underlying loss on a replacement cost basis at $6.7 billion, which includes a write-down in the value of its oil and gas exploration assets, compared to a profit of $2.8 billion in the same quarter last year. Although this was better than loss analysts originally forecast, the company lowered the pay-out to investors by 50 per cent to 5.25 cents for the first time since the Deepwater Horizon rig explosion in 2010. Its debt-to-equity ratio, also known as a gearing ratio, is above its own targets at 33.1 per cent, which places the company at risk of downgrade by credit rating agencies. It has already announced that it will cut 10,000 jobs worldwide, including 2,000 in the UK, with the company spending millions of dollars more than it makes each day.
All major oil companies have suffered huge losses during the coronavirus pandemic. Oil prices plummeted earlier this year, with changing consumer behaviour and restrictions on travel decimating demand. In April, prices turned negative for the first time ever, with producers having to pay buyers to take their oil due to fears that storage capacity could run out.
Newly-appointed CEO Bernard Looney managed to avoid cutting pay-outs in the first quarter of the year despite lockdowns across the world diminishing demand for oil. Earlier this year, the company, which paid out $7.2 billion in dividends in 2019, became the largest dividend payer on the London Stock Exchange’s FTSE 100 after Royal Dutch Shell cut its shareholder pay-outs for the first time since World War Two.
This trend can be seen across a multitude of industries; according to Link Group’s Dividend Monitor, pay-outs fell by 57 per cent this quarter; 176 companies cancelled dividends and 30 more have slashed them. Analysts now predict that the total amount of pay-outs in 2020 will fall by two-fifths, which will be a hard blow to UK pension funds which rely on the pay-outs.
Despite the huge losses suffered, BP’s share price rose by 6.26 per cent as Looney unveiled their new sustainability strategy. The strategy, which was due to be announced in September, is a plan to “reimagine energy and reinvent BP” by transforming them into a net zero emissions company by 2050. By 2030, it has vowed to increase its low carbon spending ten-fold to $5 billion a year and detailed how it will allocate capital between investing in renewables, bioenergy, hydrogen and carbon capture and storage technology. Over the course of the next decade, the company aims to reduce oil and gas production by at least one million barrels of oil each day.
Their transparency about capital allocation on renewable energy, which has been accelerated by the pandemic, offset the huge losses to increase their share price. However, there are inevitable questions over profitability and whether these ambitious targets are realistically achievable at a time when the company needs to prioritise its post-COVID financial recovery. Experts predict that this has potential to alter the course of the climate crisis by forcing the oil industry to rethink their future practices.
After their abandoned “Beyond Petroleum” re-brand just under two decades ago, the rise in share prices is an encouraging sign that investors are taking their ambitious environmental initiative seriously, which may prompt other industry giants to follow in their green footsteps.
