Breakingviews - BP limbers up for green transition high-wire act

A BP logo is seen at a petrol station in London, Britain January 15, 2015.

LONDON (Reuters Breakingviews) - Bernard Looney’s big moment has come. Over the next three days rival oil majors will be tuning in to hear the BP chief executive set out how the company’s pivot to renewable energy is going to work. The answer may not be totally reassuring: while credible, Looney’s plan resembles a high-wire balancing act.

The initial direction of travel, set out on Aug. 4, showed BP’s rivals a clean pair of heels. Looney’s pledge to cut 2030 oil production by 40% and drive a 10-fold increase in investment in low-carbon energy was ample proof of his desire for BP to become an “integrated energy company”. Moreover, the headline numbers suggest he can fund the transition.

Bank of America analysts reckon BP can generate $109 billion of operating cash flow in the five years to 2025. That’s more than enough for the $22 billion cumulative cost of a 5.25 cents-a-quarter dividend, $9 billion to reduce net debt below Looney’s $35 billion target, and $75 billion of capital investment. With a third of the latter used for wind and solar energy, BP’s renewables budget could be $50 billion over the next decade. Given new projects may also carry their own debt, that could plausibly be enough to fund the $110 billion Jefferies reckons would get the group’s renewables generating capacity to a 2030 target of 50 gigawatts.

The catch is that BofA’s estimates assume the price of oil is $55 a barrel, rather than the current level under $40. So do Looney’s ambitions to make a 12%-14% return on average capital employed. If oil undershoots, BP could find it harder to pay dividends and keep up investment.

BP shareholders have a dividend airbag of sorts: $15 billion in extra hydrocarbon asset sales by 2025. Still, August’s cut means shareholder payouts look spartan against rival Exxon Mobil’s unimpaired dividend.

The wider issue for Looney’s investors, though, is how his new stock of renewables projects performs. In theory, such assets should last longer than oil fields, potentially rewarding BP with a lower cost of capital. However, its status as a forced buyer could lead him to overpay, while Danish wind operator Orsted recently cited the risk of greater renewables capacity hitting power prices. Looney is on the right track, but it’s a dicey one.


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