It’s BP week, in case you hadn’t noticed. The management has spent three days (presumably that’s the New BP Week) explaining how the business is to be transformed from a dirty old oiler into a glistening supplier of clean energy that we can all love while driving around in our electric cars.
To help things on their way, BP is pledging to reduce its carbon footprint to “net zero” by 2050, and expects its oil and gas output to decline by 40 per cent by 2030. The company’s accompanying annual Energy Outlook has given up forecasting, and instead sees three main “scenarios” for the years ahead, which might be described as good, bad and ugly.
In the good, we are magically transported to nirvana (net zero) by 2050. The bad sees a two-thirds cut in CO2 emissions, which means the output is still rising. The ugly is “business as usual” in which we keep on burning like there is no tomorrow.
Bernard Looney, BP’s newish CEO, is not a fan of business as usual. He is even encouraging the UK government to bring forward the deadline on the sale of petrol cars from the current 2040, a stupid move that is such a political crowd-pleaser that our dysfunctional government might actually do it.
As for Mr Looney, he should be careful what he wishes for. He is promising to pour $5bn into renewables in the next decade. He thinks BP’s management and experience can deliver eight to ten per cent returns. As he did not add, this is the management and experience that has proved itself incapable of delivering big projects to time and budget and incapable of making money from them.
To be fair, BP is not alone here. The entire industry has a terrible recent record on capital allocation, but none is quite as bad as BP’s, which wrote off $17.3bn, or a quarter of today’s entire market value, in the last three months alone. No wonder the market was less than enthused this week by Mr Looney’s vision.
The only reason to think that his company can really reinvent itself is by sheer size and weight of money – the idea that BP can somehow magic returns of better than 8 per cent from renewables is a triumph of hope over experience.
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Rather than aiming to top the popularity polls, he might ask himself whether the declining oil age can produce a few years of exceptional returns. Run the business for cash from low-cost sources and asset sales, with the proceeds distributed to the shareholders. By contrast, his Brave New World looks uncomfortably like putting the National Coal Board in charge of transforming that industry for the oil age.
A first-class air fare
The UK stock market has had quite a good Covid-19 war. Participants have stumped up to fill holes in balance sheets, just as the textbooks describe the function of the market. But, boy, do those banks know how to charge.
Take the latest chunky equity raise, for IAG, the owner of British Airways. At the end of July, the company signaled its intention to raise €2.75bn to keep the show on the road while waiting for us to resume flying. The share price immediately adjusted down to 163p, half the June peak.
Nearly six weeks later, the terms were finally revealed – three new shares for every two held, effectively one step away from a rescue. The new shares will cost 92p apiece, a 36 per cent discount to the equivalent ex-rights price. In other words the shares would have to fall from today’s 128p to 92p in the next two weeks for the banks backing the issue to have to stump up.
For this essentially trivial risk (and the bureaucratic slog in preparing a 258-page document) the nine banks and one adviser earn fees of £70m, or around 3.5 per cent of the money raised. IAG shareholders will have to stay alert, and to understand that they get “subscription rights” rather than new shares. Fail to exercise them and they lapse, for no value. There is just one week left to sell them, and a fortnight left to stump up for new shares. Miss the deadline and you miss the plane. The banks’ money, by contrast, is, er, in the bank.
A nuclear option
Another nail in the nuclear coffin this week, with confirmation that there is no government bribe big enough to persuade Hitachi to embark on building a new power station in Anglesey.
It’s been clear for some years now that these monsters are losing the race between improving technology and escalating health’n’safety demands. The grim story of Hinkley Point is enough to scare off any private sector investor.
Co-incidentally, the FT carried a letter from Tom Samson arguing the case for small nuclear plants, building on the expertise that powers submarines. There is something in this, although our fear of nuclear is now so ingrained that persuading us to have one in the next street will be an uphill task.
Unfortunately, the consortium Mr Samson heads is led by Rolls-Royce, which has no money to spare for the investment needed, while it struggles to survive in its core market of making aero-engines. If prospects for his small reactors are really that bright, the solution is to spin the business out and float it on the stock market. It would give those who are constantly moaning about the UK’s lack of appetite for technology the chance to put their capital where their mouths are.