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    BP.   GB0007980591

BP PLC

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BP's green energy targets will be tough to meet

08/10/2020 | 02:07am EDT
FILE PHOTO: Logo of BP is seen at a petrol station in Kloten

BP will need to invest tens of billions of dollars over the next decade and may have to accept lower returns than it can get from oil if it is to meet its target of becoming one of the world's largest renewable power generators.

The British oil and gas company wants 50 gigawatts (GW) of renewables such as wind, solar and hydropower in its portfolio by 2030, up from just 2.5 GW now and more than the total renewable capacity in the United Kingdom at the moment.

European oil firms are under pressure from activists, banks, investors and some governments to shift away from fossil fuels and are trying to find business models that offer higher margins than the mere production of renewable energy would generate.

Last week, BP followed Eni in committing to cut its oil production over the coming decade and set a bigger target for reductions than the Italian company.

Analysts say large offshore wind farms probably offer the quickest route for BP to scale up but as they can take years to develop, and have high start-up costs, it may have to turn to acquisitions - and they won't come cheap.

"Getting value for that will be hard because these assets are very attractive and selling at very high prices," said Peter Atherton, associate at British strategy consultants Stonehaven.

BP already has debt of $41 billion (31.43 billion pounds) and as investors increasingly turn away from fossil fuel producers in favour of green energy firms, its shares have halved over the past two years, slashing its market value to under $80 billion.

By contrast, shares in Denmark's Orsted, one of the world's biggest offshore wind developers, have surged 135% over the same period to give it a market value of $60 billion.

Orsted currently has 10 GW of installed wind power capacity - still only a fifth of BP's target - and has committed to add another 3.8 gigawatts.

Shares in Spanish utility company Iberdrola, which has 33 GW of installed renewable power and is developing several projects, have jumped 78% over the past two years, bringing its market capitalisation to $80 billion, on a par with BP.

Global renewable capacity is just over 2,500 GW, according to the International Renewable Energy Agency, but that is expected to grow rapidly as countries seek to lower emissions to meet targets set under the 2015 Paris Climate agreement.

International Energy Agency data shows that renewables, including wind, solar and hydropower, accounted for about a quarter of the electricity produced in countries in the Organisation of Economic Co-operation and Development last year.

(GRAPHIC: Renewable power operators' shares outperform oil producers -

)

STRATEGY RISKS

In a strategy update on Tuesday, BP said it would cut its oil and gas output by 40% by 2030 and spend $5 billion a year on low carbon projects that it hopes will turn it into one of the world's biggest green power producers.

It is also planning to sell oil and gas assets that won't be economically viable with lower oil prices to raise $25 billion by 2025 to help fund its transition to cleaner energy.

With renewable power companies trading at high price-to-earnings ratios, analysts say BP could also build wind farms from scratch but they would come with high upfront costs.

For example, Iberdrola's 3.1 GW East Anglia wind hub project off the British coast is expected to cost about $8 billion while SSE and Total's 1.1 GW Seagreen 1 British offshore wind project is expected to cost some $3.7 billion.

Biraj Borkhataria, an analyst at Royal Bank of Canada, estimates that BP will have to spend about $60 billion to achieve its renewables target, assuming a 50/50 split between offshore wind and solar power production.

On the assumption that 70% of that amount could be raised through project financing, BP would need to make net capital spending of $18 billion over the next decade, he said.

(GRAPHIC: European oil and gas majors' power targets -

)

Jason Gammel, an analyst at investment bank Jefferies, put the bill for BP at about $30 billion plus project financing, but said the plan still depended on renewable energy assets both being available and offering acceptable returns.

"The capital requirements assume that there are sufficient opportunities available with acceptable rates of return, which we view as key risks to the strategy," he said.

Large oil firms generally target a return on oil investments of about 15%. BP said it expects returns of 8% to 10% from its low-carbon electricity investments, with the traditional oil and gas units pushing overall returns to 12% to 14% by 2030.

BP's two biggest shareholders, BlackRock and Vanguard, declined to comment on its renewables strategy. Vanguard said it held most of its BP shares in index funds. Another big investor, Legal & General, had no immediate comment. Other fund managers, including Allianz, did not respond to requests for comment.

(GRAPHIC: Renewable power generation by technology -

)

LEAP OF FAITH?

BP Chief Executive Bernard Looney said on a conference call last week that the company would only go after renewable capacity that came with the right returns - rather than chasing capacity for the sake of it.

BP's finance chief Murray Auchincloss told the same call that the company's huge trading business, its ability to package renewable power with natural gas to guarantee flow rates, and its expertise with currencies and hedging services can push returns "well into the double-digit range".

Some analysts are sceptical.

Royal Bank of Canada's Borkhataria expects the return on renewables to be about 7%.

"It's difficult to see these being double-digit return projects," he said. "The energy sector has been unable to execute its strategy on its core business, so I'm not that confident in taking another leap of faith on a new business."

Lead oil and gas analyst at Fitch ratings agency, Dmitry Marinchenko, said while renewables might be a less profitable business now, BP was betting that returns from oil and gas would be weaker in the future.

"The energy transition road will be bumpy for oil majors; they have little experience in renewables and new investments will make them subject to the execution risk. Not all investments will probably prove to be successful," he said.

"However, the 'business as usual' approach could be overly risky in the long term. Reinventing the business now that oil prices are still relatively high should be easier than in 10 years' time."

By Shadia Nasralla and Susanna Twidale


© Reuters 2020
Stocks mentioned in the article
ChangeLast1st jan.
ALLIANZ SE 0.79% 210.5 Delayed Quote.4.88%
BP PLC 0.04% 284.1 Delayed Quote.11.50%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.05% 0.7958 Delayed Quote.1.31%
ENI S.P.A. 0.26% 9.669 Delayed Quote.13.11%
IBERDROLA, S.A. 0.58% 10.425 Delayed Quote.-10.90%
LEGAL & GENERAL PLC 0.46% 263.8 Delayed Quote.-0.86%
ORSTED A/S -1.79% 944.4 Delayed Quote.-24.05%
SSE PLC 1.57% 1522 Delayed Quote.1.47%
TOTALENERGIES SE -0.01% 35.635 Real-time Quote.0.95%
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Financials (USD)
Sales 2021 219 B - -
Net income 2021 10 277 M - -
Net Debt 2021 39 965 M - -
P/E ratio 2021 8,34x
Yield 2021 5,38%
Capitalization 78 717 M 78 780 M -
EV / Sales 2021 0,54x
EV / Sales 2022 0,49x
Nbr of Employees 63 600
Free-Float 93,9%
Chart BP PLC
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BP plc Technical Analysis Chart | BP. | GB0007980591 | MarketScreener
Technical analysis trends BP PLC
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Income Statement Evolution
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Mean consensus HOLD
Number of Analysts 26
Last Close Price 3,91 $
Average target price 4,96 $
Spread / Average Target 26,9%
EPS Revisions
Managers and Directors
Bernard Looney Chief Executive Officer & Director
Murray Auchincloss Chief Financial Officer & Director
Helge Lund Chairman
Gordon Young Birrell Executive Vice President-Production & Operations
Paula Rosput Reynolds Senior Independent Director
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