BP Stock – Oil’s Rebound Greases the Way for Energy Giants’ Green Pitch
Investors returning to
Royal Dutch Shell
are likely more interested in higher oil prices than green transition plans. Still, the energy giants have a much-needed opportunity to pitch their decarbonization strategies from a position of strength.
On Thursday, Shell said it made $8.3 billion in cash flow from operations in the first quarter, up by 32% over the previous quarter. Earlier in the week, BP said its own tally was $6.1 billion, more than double the prior period. These were strong results after a dreadful year.
The improvements were fueled primarily by higher commodity prices. Production discipline among the cartel of oil-producing countries and their partners has kept crude prices strong this year, despite the mixed demand picture, as some major markets reopen, while others contend with resurgent Covid-19 infection rates. Higher oil and gas prices also helped both companies accelerate their massive divestment programs.
Flush with cash, Shell and BP paid down debt and raised shareholder payouts. Shell’s quarterly dividend grew 4% over the previous quarter’s, while BP kept its flat but restarted buybacks. Both are trying hard to rebuild shareholder trust after cutting their sacrosanct dividends last year.
The cut hit Shell’s stock hard and investors balked at BP’s new green strategy. Their shares have trailed most rivals’ since. The payouts were reduced to cope with plunging commodity prices and growing uncertainty about future oil demand, while also freeing money up for green-energy investments. Shell has been talking of shifting to lower-carbon businesses for years, while BP pivoted last summer with the zeal of a convert.
The company’s transition plans left the stocks in a no-man’s-land—not dramatic enough to attract green investors but sufficient to scare off some traditional buyers. Historically, shareholders have liked petroleum producers because of their reliable dividends funded by international portfolios of high-risk, high-return oil and gas exploration projects that could ride out price fluctuations. Many of those buyers remain skeptical that a clean-energy business can provide a similar level of return.
BP’s generous winning bid for two UK. offshore wind leases in February fed those worries. Management insists the site has specific advantages that justify a premium and maintains it will meet the company’s 8% to 10% target return for clean-energy projects. It will be years before the wind farm is completed and the results are in. Until then, BP investors need to have faith—a commodity in short supply after last year’s drama.
Rising stock prices signal that investors are starting to trust Europe’s big oil companies again, presumably because the outlook for cash returns is so much better. That gives the companies a chance to detail their plans and deliver on some intermediate green milestones, while also keeping investors happy with growing dividends. Shareholders may eventually come round to the value of long-term transition strategies as corporate “net-zero” emissions commitments, state decarbonization plans and clean-energy incentives continue to pile up.
Ironically, higher crude prices might be just what big oil companies need to convince their traditional shareholders of the wisdom of moving away from fossil fuels.
Write to Rochelle Toplensky at [email protected] Zoom.com
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Appeared in the April 30, 2021, print edition as ‘Oil-price Rebound Paves the Way For Green Pitches.’