After halting exploration activity and curtailing capital expenditure in response to the Covid-19 pandemic, BP (NYSE: BP) released a new strategic direction with a focus on renewables and mobility along with the second-quarter results. The company incurred an $11.8 billion impairment charge and $9.6 billion of exploration write-off due to the revised outlook of oil & gas prices in the coming years. With renewable energy generation and electric mobility as key areas of profitable growth, BP is targeting a 4-percentage point jump in ROACE (return on average capital employed) from 8.9% in 2019 to 13% in 2030. Interestingly, the company plans to spend nearly 50% of its capital expenditure budget on the low carbon energy portfolio and future mobility solutions. Trefis highlights the historical trends in BP’s Revenues across segments in an interactive dashboard analysis.
Upstream oil & gas production to decline by 23% by 2025
While the upstream oil & gas production declined by just 3.5% (y-o-y) to 2.5 MMBOED, the revenues observed a 47% contraction due to weak benchmark prices. As nearly 80% of the capex budget is directed towards the Upstream segment, the company’s long-term price assumption of Brent remaining under $50/barrel until 2025 has brought a significant shift to its capital allocation strategy. In 2019, BP spent nearly $13 billion on its hydrocarbon business (Upstream & Downstream) and it plans to reduce it by a staggering 30% to $9 billion by 2025. Thus, the upstream production volumes are likely to contract by 23% to 2 MMBOED. Also, the company plans to further lower the upstream production volumes to 1.5 MMBOED by 2030 – a 40% reduction in the coming decade.
Will electric mobility drive BP’s profitability?
Currently, BP recognizes revenues from the alternate energy business under the Corporate segment. In 2019, the company earned just $1 billion (less than 0.4% of total revenues) from other businesses and corporate activities. Per recent filings, the company has 2.5 GW of installed renewable power and 7,500 EV charging points across the globe. Due to the expectations of weak fossil fuel demand, the company plans to expand its renewable capacity by 8x and EV charging points by 3x in the next five years. Moreover, the share of capital expenditure towards BP’s transition portfolio, including low carbon electricity, electrification, mobility, renewable trading, etc., is expected to be almost 50% of the total capital expenditure budget by 2025. While the renewable energy business is expected to generate a ROACE of 8-10%, the convenience and mobility solutions are likely to be a key driver of BP’s profitability with a ROACE of 15-20%.
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