Last Tuesday it was finally time: After the major oil companies Exxon Mobil and Shell had already presented, it was now BP’s turn with new figures. In short: The figures were surprisingly good, which immediately helped the stock, as you can see in the chart (as of February 9, 2024, 10:00 am):

Source: www.stockscreen.com

BP delivers strong cash flow despite market normalization: Shareholders to be rewarded According to this, the adjusted profit for 2023 was $13.8 billion after special effects. This is a significant decrease compared to the strong previous year ($27.7 billion). However, in 2022, the market turmoil caused by the Ukraine war had caused gas and oil prices to skyrocket. Meanwhile, the market has normalized again. The fact that BP was still able to achieve such a high billion-dollar profit was very positively received by the stock market.

The fourth quarter in particular proved to be a source of money. Although net profit in Q4 dropped significantly due to write-downs on commodity-related financial instruments, the operating cash flow remained significantly high at $9.4 billion. This immediately gives BP financial leeway to reward shareholders generously once again. The management has announced a share buyback program of $3.5 billion for the first half of 2024 alone. In addition, there will be a +10% increase in dividends.

Energy transition: Is BP spending too much money on short-term returns? What you as an investor should not underestimate: The shareholder rewards are not entirely unproblematic in terms of the long-term perspective. The focus is on the transformation from a pure oil and gas company to a diversified and environmentally sustainable energy giant. BP has already declared itself a „pioneer of green energy“ a few years ago. The oil company had emphasized the importance of investments in the expansion of wind power, charging infrastructure for electric cars, and green hydrogen at the time.

But the turn towards the energy transition has recently also caused considerable criticism. The activist investor Bluebell Capital Partners branded BP’s green agenda as „irrational“ and called for investments in renewable energies to be redirected to oil and gas. The investor is mainly referring to the recent weak market environment for wind power and electromobility due to macroeconomic resistance (especially high interest rates).

Although BP has not fundamentally deviated from its energy transition strategy, the extremely high share buyback programs and dividends again reduce the investment volume for operational growth. The new BP CEO Murray Auchincloss, who only took over from the unexpectedly resigned company boss Bernard Looney in January, now plans to distribute at least 80% of the surplus cash inflows to shareholders. Previously, the target had been 60%. The calculation: Auchincloss wants to keep shareholders on board with higher rewards and appease critics like Bluebell with returns. At the same time, the new boss wants to keep investments in the operational business under control.

In the long term, BP’s strategy (short-term returns for shareholders) could jeopardize its transformation, which is essentially mandatory in view of government requirements. Of course, oil and gas will remain important energy resources for the functioning of the world economy for the foreseeable future. However, government regulations (e.g. CO2 price and Scope 3 targets) are likely to become much stricter in many major economies in the coming years, which could affect the business with fossil resources in the long term.

Solar power: New BP CEO wants to strengthen Lightsource business At least: The new company boss is not idle in this matter. As part of the annual presentation on Tuesday, Auchincloss announced that he wants to attract new partners for the solar developer Lightsource BP. Background: BP had announced last November that the company would take over Lightsource BP completely and buy the remaining 50% of the shares in the joint venture for $322 million. The oil company wants to expand its capacities in the area of renewable energies.

Now, Auchincloss wants to boost Lightsource’s business through cooperation. The CEO wants to show critical investors that returns can be achieved with renewable energy. In fact, Lightsource offers a good basis for this. The company was founded in 2010 and has since become a big player. The PV specialist develops solar projects in 19 countries. To date, it has developed a capacity of 8.4 gigawatts and has another 61 gigawatts in the pipeline. According to Auchincloss, Lightsource already generates returns in the mid-ten percent range today, which can compete with the oil and gas business.

By the way: By 2030, BP wants to achieve an EBITDA operating profit of $10 to $12 billion with the so-called „transition growth engines“ (including biofuels, EV charging infrastructure, convenience stores, hydrogen, and renewable energies). This would be significantly more than in 2023 ($1.0 billion), but still only a quarter of the total operating profit from last year.

My conclusion for you BP is currently in a significant tension between short-term returns and long-term growth prospects. For the management, which wants to bring or keep as many shareholders on board as possible, this is a tightrope walk. Keep this topic in mind, especially as a long-term oriented investor.