It has been more than a month since BP (NYSE:BP) reported terrible first-quarter results that included a 67% decline in adjusted net income along with a 10% drop in sales. Thankfully, or not, depending on how you look at the situation, the company maintained its quarterly dividend for BP stock at 63 cents, good for a dividend yield of over 10%.
Energy producers, big or small, are destined to face a difficult economic landscape in the future. The latest quarterly report doesn’t completely reflect the effect of collapsing oil prices in early March due to the Saudi Arabia-Russia price war as well as from lower demand for oil due to the novel coronavirus later in March. The second quarter should be equally as unflattering.
According to Bloomberg, the combined cash from operations of the five largest oil majors (BP’s one of them) in the first quarter was only $27 billion, well short of the cash needed to pay dividends, interest, operating expenses and investments.
BP CEO Bernard Looney recently stated that oil’s best days might be behind it.
“It’s not going to make oil more in demand. It’s gotten more likely to have oil be less in demand,” Looney told the Financial Times while discussing life during Covid-19. “I don’t think we know how this is going to play out. I certainly don’t know … Could it be peak oil? Possibly. Possibly. I would not write that off.”
Former BP CEO John Browne, who served as chief executive for 12 years between 1997 and 2007, said in April that oil prices could stay low for a significant period, reminiscent of the 1980’s when they stayed low for 17 years.
In November, I suggested that fossil fuels were a dying breed and that new CEO Looney, albeit younger than his predecessor, faced some extremely difficult challenges.
However, when it comes to the future, BP’s CEO seems to understand where the world is headed in terms of energy use, and it isn’t fossil fuels.
If you own BP stock, the company’s push into alternative sources of energy provides a glimmer of hope. Here’s why.
Reimagining Energy
Right there on BP’s corporate website is a page full of aims meant to reimagine energy. Included in its plan to reimagine energy, BP has five aims to become a net-zero company by 2050, which means it plans to have net zero emissions across the entire company and is carbon neutral.
To get there, BP will have to remove 360 million tonnes of emissions from its upstream oil operations and 55 million tonnes from its operations. Easier said than done. It’s also looking to a 50% reduction in the carbon intensity of the products it sells. The Climate Council defines carbon intensity as “the volume of emissions per unit of GDP.”
So, when the GDP increases, so too do emissions. Therefore, the absolute reduction of emissions is the more important of the two targets.
Of the five aims to become a net-zero company, BP wants to increase the proportion of investment into non-oil and gas. This last one, in my mind, is what all energy companies must do if they are to remain sustainable businesses well into the future.
Therefore, when I read CleanTechnica contributor Tina Casey’s recent article about BP’s deep dive into green hydrogen, I was intrigued. Could an oil and gas producer actually understand where the world is headed?
As Casey points out, the world’s demand for natural gas has risen in recent years as more of our needs are met through the use of natural gas, including the production of hydrogen. She highlights Exxon Mobil’s (NYSE:XOM) 2040 energy demand forecast, which suggests natural gas will account for 25% of the demand for all types of energy.
This is where green energy comes in.
“Back in 2017, BP revived its once-dormant interest in solar power by forming a 50/50 partnership with the solar company Lightsource to form Lightsource BP, and it seems that the partners are already looking beyond clean power to dip into the renewable hydrogen field,” Casey wrote on May 18.
By investing in energy sources like renewable hydrogen and green ammonia, Casey believes BP and others following this path can ultimately kick Exxon Mobil to the curb.
If you own BP stock, that’s a very good thing.
The Bottom Line on BP Stock
Of all the major oil producers, BP’s moves seem like the most realistic. Now, that being said, a lot can happen between 2020 and 2050. Looney could leave or be asked to leave. The board could change its mind. Oil and natural gas prices could return to peak levels.
As Looney said, who knows what’s going to happen?
I’ll be paying closer attention to the company’s moves in this area. For now, however, I can’t recommend BP stock. There are just too many risks, including a high level of debt.
Happy investing.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.