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Oil major BP is going through some choppy times. First came the shock departure of chief executive Bernard Looney, replaced on an interim basis by Murray Auchincloss. Now, in its first set of results since the upheaval, it has missed market expectations by a country mile.
Little wonder, then, that BP’s shares have trailed rival Shell’s in the past year. Also — amid a spate of US dealmaking — chief executive Murray Auchincloss has been forced to dismiss speculation it might become a takeover target.
Yet the turbulence at BP masks a company that is relatively well positioned to navigate the energy transition.
Third-quarter weakness was the result of BP’s gas trading business, which is inherently volatile. Oil and gas production — still very much the engine of the company — posted $3.1bn of operating profit, higher than consensus estimates.
The good news for investors is that Resilient Hydrocarbons, as this division is now known, really is surprisingly resilient. BP — which expects to pour some 60 per cent of investment in upstream from now until 2030 — reckons that liquids production will grow by 3 per cent a year on average until 2027. That could be particularly juicy if — as the World Bank has warned — oil prices were to spike on geopolitical and supply security concerns.
On top of that, BP also has a low-carbon strategy, which makes sense. It no longer wants to build renewable capacity on the back of long-term electricity contracts. It learnt the perils of that approach the hard way: in the third quarter, it wrote down two US wind projects by $540mn after the State of New York declined to pay more for power.
Instead, BP wants to focus on more profitable niches such as hydrogen and biogas. Concerning the latter, it bought the Archaea landfill business and believes it can make returns above 15 per cent. The power it does produce it plans to use itself, for its clients and its operations.
Growing oil production and profitable renewables suggest BP will make more money than its share price implies. Indeed, its free cash flow yield is set to rise from 13 per cent to 15 per cent in the second half of the decade, says Bernstein, a broker. That is among the highest in the sector. Such a cash gush should be attractive for investors — and potentially rivals too.