We’ve been saying for a while (and we’re hardly unique in this) that Covid-19 isn’t so much a world-changing event as a trend accelerator.
In other words, stuff that was already happening will happen faster. We’ll use more video calls. We’ll work from home more. And, reckons oil major BP, we’ll also be using a lot less oil.
Don’t bet on BP maintaining its dividend
Oil major BP has already warned that it will cut 10,000 jobs – roughly 15% of its workforce – by the end of this year, to cope with the effects of both coronavirus and crashing oil prices.
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Now it has made another big move towards reshaping itself for a long term where oil is less vital to the global economy’s energy demands. It plans to write as much as $17.5bn off the value of its assets as it cuts its long-term forecasts for the price of oil. In effect, BP is forecasting lower demand for oil and a faster transition away from the fossil fuel than it had previously expected.
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According to the FT, BP now expects Brent crude prices to average $55 a barrel (which is about 30% below its previous forecast of $70) over the next few decades up to 2050. It also expects natural gas prices to be a lot lower. Meanwhile, it has revised its expectations on the cost of carbon dioxide emissions up from $40 per ton to $100 per ton by 2030.
Why the big change? Under its new chief executive, Bernard Looney, BP has already talked a lot about making a transition towards being a “leaner” and “more diversified, resilient and lower-carbon energy company”.
Ultimately, that’s because – even before Covid-19 and a price war knocked the oil price for six – there is a belief that the oil era is nearing its end. Electric cars are becoming ever more popular. Carbon emissions are becoming ever less popular. The logical conclusion is that, while we’ll still need oil (I’m not sure how we’ll replace plastic in a hurry), we won’t need as much of it.
That’s bad news for companies that make their living by producing oil (and countries too – look at Saudi Arabia’s hurried attempts to retool its oil-dependent authoritarian economy).
So what does this all mean?
In the short term, I suspect this is more bad news for dividend investors. Unlike its rival Shell, BP hasn’t yet embraced the opportunity to rebase dividend expectations. But I’d be astonished if it doesn’t take the chance soon. There’s scarcely an analyst out there who doesn’t expect BP to cut its dividend and, with second quarter results coming up, it’s the perfect time to do so. It’s also trading on a 10% yield, which implies that investors know that it’s too good to be true as well.
It does rather leave income-hungry investors looking ever more forlorn, however. We’ve written several times already in MoneyWeek magazine about what to do about the great dividend massacre, and we’ll be writing about it a lot more in the near future. If you’re worrying about income generation, then subscribe now to get your first six issues free.
BP needs a plan B
But what about the longer term?
The assumptions about oil might be wrong. Maybe electric cars won’t take off. Maybe the crash in the oil price will encourage everyone – especially in the US – to go back to gas guzzlers. Perhaps Covid-19 will in fact lengthen the oil era, rather than shortening it.
But making that assumption is probably not sensible. It’s certainly a bit of an ostrich move for any oil executive.
So if you’re running an oil major, it makes sense to do two things. One is to focus on making the most of the assets you have already invested in. If oil majors genuinely think that we’re close to or even past the era of peak oil demand, then their goal has to shift from finding more oil and maximising production to maximising the profitability of existing assets.
That makes sense because either you’re right, and the assets you might have otherwise spent time and money extracting are in fact worthless (“stranded” in the jargon). Or it turns out that you’re wrong and we need a lot more oil than expected, so you just turn the exploration function back on and enjoy the fact that you can sell your existing oil reserves for more than you’d expected.
That’s what BP is doing right now. Covid-19 offers the perfect excuse to do this without it looking like yet another half-baked change of strategy, or a heartless round of cost cutting and job shedding.
The second thing is the trickier bit though. If oil is a spent force in our society (in the long run), then you need to get out of the oil business.
Yet it’s worth remembering that BP was re-spun as “Beyond Petroleum” ages ago, back in 2000, and the days of the “Sun King” John Browne. Today, 20 years later, we’re not describing BP as an energy company. We’re still describing it as an oil company.
Thirty years is a long time. As a CEO, you can say you’ll be net-zero emissions by 2050, and you won’t be around to get pulled up on it. It’s basically meaningless, regardless of how well intentioned it might be.
The truth is, it’s not at all clear to me what BP becomes if it’s not an oil company. I don’t think that necessarily matters that much right now – I’d be happy to hang on to it, although I wouldn’t be in a rush to top up at this level.
But at some point, we need to hear more than words from BP. This might be just yet another cyclical downturn in the oil market – but I think the need for a feasible “Plan B” that goes beyond PR guff is now more important than in the past.
We’ll have a lot more on this topic in future editions of MoneyWeek – subscribe here if you haven’t already.
