BP's rebrand is now remembered as a failed attempt to outrun its past. Photo / AP
BP's rebrand is now remembered as a failed attempt to outrun its past. Photo / AP
COMMENT:
Almost 20 years have passed since BP turned into a sunflower. The oil company's redesigned logo was part of a much-derided corporate makeover — costing a reported US$200 million ($187.4m) — under the slogan Beyond Petroleum. The so-called Helios mark was named after the Greek sun god, BP explainedat the time, saying it "resembles a dynamic burst of energy" whose "radiance is a daily reminder of our aspirations and purpose".
BP's rebrand is now remembered as a failed attempt to outrun its past. Radiant aspirations were soon eclipsed by a catalogue of environmental disasters, including a pipeline leak in Alaska's Prudhoe Bay in 2006 and the Deepwater Horizon oil spill of 2010.
There is an argument that BP moved too early. John Browne, BP's chief executive until 2007, has written that the Beyond Petroleum tagline came from a realisation "that Big Oil must move towards a low-carbon world". This "went further than the public could then accept", Lord Browne said.
So is the public ready now? Bernard Looney, BP's chief executive since February, seems unsure.
There have been bold statements of intent. Looney set a target shortly after his arrival for BP to become a net-zero emissions company by 2050, and told the Financial Times last month that coronavirus had bolstered his "personal conviction" about a strategy shift towards low-carbon energy. But ahead of a strategy day scheduled for September, there has been no detail on how BP will reach the target.
All BP investors have to go on in the meantime is his preparatory work, the most significant of which has been this week's resetting of energy price assumptions and US$12 billion of debt raising. The size of these actions suggests Looney's ambitions are as grand as his words.
BP's decision to cut its long-run oil forecast by US$20 to US$55 a barrel as part of a strategic review has caught most of the attention. The change involved some scarily big numbers, with exploration assets and equipment previously valued at up to US$11b now written off as worthless.
It was an overdue switch, however, and the share price barely moved. The industry-wide assumption of oil prices always rising was already accepted to be at least five years out of date. Applying more caution was welcomed, as it should mean fewer exploration and development projects that rely on higher market prices to break even.
Harder to explain were the new valuations of existing fields, where future cash flow potential was calculated using the same oil price assumptions as exploration. Using the same price both for carrying values and investment thresholds smacks of pessimism, given that, as UBS analysts observe, it is more common to hope for the best but plan for the worst. A business plan framed around flat oil prices into perpetuity suggests that management thinks legacy assets should be run down to obsolescence rather than improved.
Then came BP's sale of perpetual bonds. The US$12b raised could cover BP's current capital expenditure budget for about a year, or fund current dividend costs for 18 months. The new borrowings will cost BP about US$480m a year in interest, however, so supporting investment rather than defending shareholder returns appears the only sensible use of cash. Easing pressure on BP's balance sheet might have delayed a dividend cut but will surely not avert it.
BP chief executive Bernard Looney. Photo / Getty Images
A third, less examined element of BP's week was its new carbon emissions forecast. In tandem with the oil reset, BP raised its long-term price estimate for carbon credits from US$40 a tonne to US$100, or about three times the current European benchmark level.
The revised numbers make the future value of renewable power investments look a lot more attractive, compared with fossil fuels. They are, however, a gamble that shareholders will be asked to take.
"Who's carrying the risk here if the BP view of the world is wrong?" asked Citigroup analysts this week. "Equity [owners]. In the same way that marginal oil capital is being impaired as prior inflationary oil price views are reset to reality, exactly the same result will apply to new energy investment that is premised on a forecast that is wrong."
There is much to applaud about BP's green ambitions. It appears, however, that while the vast majority of group earnings will continue to come from upstream oil, the attention of investors and management will be concentrated in renewables, where the company has little experience and few competitive advantages. And, as the 2000 rebranding exercise shows, dirty realities have a tendency to follow grand ambitions.
Until it is made clear how BP intends to outrun its past this time, investors may want to sit this one out.
