You won’t believe what BP’s CEO said about climate change (NYSE: BP)
Climate change is a key issue and a top concern for many Americans. While more people than ever are coming to the realization that climate change is a real issue that is not going away and must be dealt with, for the most part, corporate America has remained silent on the issue. That should not come as a surprise, since Big Oil has a vested interest in keeping the world addicted to fossil fuels.
But that could all be changing. In a rare display, Bob Dudley, Chief Executive Officer of BP plc (NYSE: BP), acknowledged climate change and urged global governments to pursue policy changes that incentivize shifts to lower-carbon fuel sources, such as renewables.
Dudley spoke at the BP Energy Outlook conference in London, on Feb. 10. This represents a remarkable step forward for not just BP, but Big Oil in general. And, Dudley’s speech isn’t just lip service; BP is putting its money where its mouth is by increasing its investment in new sources of energy.
Actions speak louder than words
Dudley made a number of impactful statements, such as “The path to 2 degrees Celsius and below requires emissions to fall starting now”. This statement refers to the maximum increase in global temperature that climate scientists widely agree will keep rising sea levels and other harmful environmental consequences in check.
One specific policy proposal Dudley touched on to combat rising global temperatures is extending similar taxes on fossil fuels that exist in the European Union to other parts of the world, including the U.S. and China. These comments were shocking, considering they came from the top executive of one of the world’s biggest oil companies.
Thousands of barrels per day
The world has seen a notable rise in global oil production in the past three decades, which has greatly enriched Big Oil.
That makes Dudley’s comments curious, to say the least. It stands to reason that no CEO would make comments calling for policy changes that would directly endanger his own company’s future. Fortunately for shareholders, BP has made significant investments in cleaner energy projects that can help BP lead the way towards the new energy future. One emerging area is natural gas, which is far from a clean source of energy, but it nevertheless represents a satisfactory ‘bridge’ fuel in the long-term transition from fossil fuels to renewables.
Approximately 50 percent of BP’s current production is gas, and that will grow 60 percent by the mid-2020s. Its two biggest gas projects currently in construction are the Shah Deniz 2 project and the Oman Khazzan project. Both projects are set to come online within the next few years. These are massive undertakings; the Shah and Oman projects hold 40 trillion cubic feet and 100 trillion cubic feet of natural gas, respectively, and the projects are coming at a good time, as natural gas is expected to be among the fastest-growing energy sources moving forward.
Renewables are also projected to grow at an above-average rate over the next several years, and BP has placed significant investment in this area as well. For example, BP claims to have the largest operating renewables business of all the global super-majors, with approximately 3 million tonnes of avoided carbon dioxide in 2014. Furthermore, BP has three Brazilian biofuel mills in operation that cumulatively produce 643 million litres. And, BP operates 16 wind farms in the United States, with 4.700 gigawatts of production.
The growth of demand for natural gas and renewables will likely result in lower demand for existing fossil fuels, such as oil and coal. BP’s strategic advancements in natural gas and renewables are a clear indication that the company intends to back up its strong words with action.
Implications for investors
Analysts are slowly coming around to the potential BP has in renewables. The company could use any new revenue streams it can get its hands on. Analysts currently expect the company to earn just $1.28 per share in profits in 2016, but earnings are projected to rise to $2.85—a more than 100 percent increase—the following year. Furthermore, the median price target for BP shares is $34.90, which represents approximately 20 percent upside from current levels. The investments BP has placed in renewables could help the company meet these forecasts.
The takeaway for investors is that BP may be changing its internal culture, which could have financial ramifications. By embracing different sources of fuel such as renewables, the investments BP is making today could pay off tomorrow. While most other members of Big Oil sit on their hands, BP could grab critical market share in new energy markets as a first-mover. In addition, BP’s appeal to more environmentally-conscious investors could help its stock price, if it can convince these types of investors to buy and hold the stock as part of a socially-responsible portfolio.
Companies to watch
Exxon Mobil (NYSE: XOM): Analysts are modestly bullish on Exxon with an average of ‘buy’, but not by much. The median price target is $82 per share, only 1 percent from Exxon’s Feb. 16 closing price. But what Exxon has going for it is that it is one of the only other Big Oil companies to publish lengthy research that both acknowledges and prepares itself for climate change.
In its massive report The Outlook for Energy: A View to 2040, Exxon forecasts that by 2040, global energy demand is expected to increase 35 percent from 2014 levels. This sharp rise in energy demand is driven primarily by global population growth. Exxon projects the world's population to reach 9 billion by 2040, from 7 billion currently. In addition, economic growth means additional energy consumption. ExxonMobil also believes the world's economy will double by 2040, which represents an annual growth rate of approximately 3 percent.
ExxonMobil is preparing itself by investing heavily in bridge fuels such as natural gas, which are poised to bridge the gap between coal and renewables. Exxon acquired XTO Energy in 2009 for $31 billion, making Exxon one of the world’s biggest natural gas producers. Exxon forecasts over 70 percent of the world’s electricity will come from natural gas and renewables by 2040, and is positioning itself in a world no longer driven by coal. While oil is to remain the world's main energy source, other forms—including natural gas and renewables—are gaining traction as well.
Disclosure: The author is long BP
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.