August 4 2021
These ups and downs demonstrate the challenge of ditching oil. In the second quarter, BP’s CEO, Robert Dudley, announced strong financial results, and announced a dividend increase. Which is excellent, except for the recent spike in crude prices, which is a double-edged sword.
When looking at oil prices which have increased to $73 a barrel, the benefits to Looney are quite clear. His financing package provided for net debt to be reduced to 26% of total capital, spending of $13 billion on renewables and hydrocarbon projects each year, and a 4% dividend increase to shareholders, who had assumed the dividend would remain fixed at 5.25 cents per share. Oil corporation BP shares rose by 3.5 percent because of this news.
While higher crude prices encourage short-term investors to concentrate on companies that plan to produce lots of it, they also encourage investors to become more risk-averse. Compared to the targets that competitors like Royal Dutch Shell have proposed, Looney’s plan for a 40% cut in oil and gas production by 2030 is steeper (RDSa.L). Furthermore, by putting itself in opposition to BP’s decision to raise its oil price assumption from $55 to $60 over the rest of the decade, Looney’s group hints it might have skipped out on some of the profit. Shell announced recently that it is raising its dividend by 38 percent.
Looney finds it sad that the members of the oil investor community focus on companies’ ability to pay dividends in the present rather than their more general strategies to develop a business that is not entirely dependent on fossil fuels. BP used to commit to paying out about $4 billion annually in dividends. Cost of equity, minus 2% Morgan Stanley thinks dividends can rise forever, leads to $80 billion in market capitalization. Free cash flow that is not distributed means some of the money is going into wind farms and other environmental technologies. In the context of Looney’s announcement to raise his dividend, investors’ assessments of other companies seem meaningless, so he must have made the right decision. But winning this game is difficult. Shell will be able to pay out $8.3 billion annually, according to Morgan Stanley. Unfortunately, we will never get investors to stop being such ostriches and realize that BP appears to have the better approach for addressing climate change. However, this won’t help the firm boost investor confidence at this point.