BP: LEADERS OF THE ENERGY TRANSITION?
Background
On June 29th 2020, BP announced they had reached a deal to sell their remaining petrochemicals business to INEOS. In their unexpected announcement, BP outlined the $5 billion deal.[1]
The History of BP and INEOS
By revenue, BP is the 4th largest oil company in the world, consistently ranking in the top 7 companies on the FTSE-100 by market capitalisation.[2]Privately-owned INEOS is one of the world’s largest chemical producers with revenues totaling $17.25 billion during the 2019 financial year. Historically, INEOS have acquired BP assets which no longer fitted their ever-changing strategy. Starting with deals to buy the Innovene and Grangemouth site, and the North Sea Forties pipeline system, INEOS have demonstrated a history of growth via acquisition within their petrochemical business over the last fifteen years.[3]
For over a century, BP has been at the forefront of the non-renewable energy sector. However, recent pressures to achieve a more renewable energy mix has led to BP adopting an alternative strategic direction. After being left with a shattered corporate image from the Deepwater Horizon disaster a decade ago (which cost BP an estimated $65 billion in damages), the adoption of this renewable strategy makes sense. The decision to sell the petrochemical division follows a bundle of selloffs announced by BP in the last year, including the decision to exit the Alaskan market after 60 years of operation, in addition to selling a substantial chunk of North-Sea assets to Premier oil at the start of 2020.[4][5]This deal will deliver BP’s ambitious $15 billion dollar divestment plan a year early, which is crucial in allowing BP to ‘further strengthen their balance sheet’. In practice, this will enable the firm to unlock cashflow sooner.[6] Their exit from Alaska’s oil discovery market was described by Bob Dudley, former CEO, as fitting with BP’s “reshaping agenda”, since there are numerous “other opportunities in the US and across the world”. [7][8]
The most recent sell-off is extremely significant to BP’s realignment and strategic focus towards renewable energy. Bernard Looney’s appointment as CEO has been a significant driving force behind this transformation. Since joining, Looney has pledged to increase investment in renewable energy by ten times, to $5 billion per year. In addition, he aims to cut oil and gas production by 40% within a decade, replacing it with 50 gigawatts of renewables production by 2030. [9]
He described BP’s most recent deal as “another deliberate step in building a BP that can compete and succeed through the energy transition”. Hence, it is clear that Looney is adjusting their business model to cater for cleaner and more sustainable energy production. [10]
In addition, non-renewable energy has received negative publicity by rising environmental tensions and pressure from investors. This has urged BP, among others, to reassess their activities and to find ways of making them more environmentally friendly. The newly implemented strategies aim to carry out this transition, with the goal of making BP ‘Net Zero’ by 2050; an ambitious target. [11] [12]
The Deal
INEOS have paid BP a deposit of $400 million and will pay an additional $3.6 billion at completion of the deal expected by the end of 2020, subject to regulatory approvals. Three further payments, amounting to $1 billion, will be paid by June 2021 with the 1700 staff under BP’s petrochemical division expected to transfer to INEOS.[13]
The petrochemical business can be split into two core areas: aromatics and acetyls. Each subdivision boasts advanced technologies of their own, with a robust presence in growth markets throughout Asia. The petrochemical business unit has interests across 14 manufacturing plants through Europe, Asia and the USA with 2019 production at 9.7 million tonnes.[14]
The rationale for this deal is simple; BP have a product area which no longer aligns with their core strategy and INEOS are looking to continue their rapid growth and increased market share within the global polymer market.[15] INEOS have also been prolific in the news over the last five years and have diversified their offerings, with plans to start production of a 4×4 car, in addition to high-profile Formula One and cycling sponsorship deals. [16] [17] The latest decision to purchase this established and profitable business unit allows the company to further assert themselves in the UK, with petrochemicals continuing as a core offering of INEOS.
Financials
The last five years have been extremely turbulent for energy stocks. Despite reporting a 2019 revenue of $282 billion, BP’s finances have experienced a very challenging period. At the height of the global energy downturn which began in early 2015, BP found their share price as low as $4.29 per share before rising to a high of $7.66 per share in October 2018. However, further trouble still loomed. Following on from the global energy downturn and a lack in global oil demand due to COVID-19, energy companies have suffered. This has resulted in BP’s share price tumbling again to as low as $3.25 per share, before climbing to current levels of around $3.85 per share. [18]
Whilst the company justifies the latest deal “as a strategic step in reinventing BP”, its financial significance cannot be ignored. Analysts are expecting BP to cut their dividends for the foreseeable future in the anticipation of reducing debt and freeing cashflow. However, this move will not be forgotten with investors who are accustomed to BP paying some of the highest dividends on the FTSE-100, so the long term damage to BP is unknown.[19]
Reporting the highest net debt-to-equity ratio since 2015, BP took swift action in writing off debt equating to $17.5 billion in June 2020 with CEO Bernard Looney warning “that the recovery could take a long time.”[20]
Comparatively, INEOS have remained robust during the global energy downturn, with revenues remaining strong over the last five years – a testament to their capabilities for this cash deal. During the worst of the sector specific downturn, revenues dipped by 25% to $13.3 billion for the 2016 financial year, before rebounding to $16.5 billion in 2019. [21]
Conclusion
BP’s decision to sell a business unit as core as their petrochemical arm is clearly an example of the increasing relevance of Environmental, Social and Governance (ESG) factors to businesses.1 Exiting Alaska was arguably viewed as the first step in diversification and decarbonisation. It also demonstrates that they are at the forefront of the ‘energy transition’, and that they are transitioning to become “an integrated energy company.”
That said, recent transactions such as Chevron’s acquisition of Noble Energy has highlighted how some major players in the sector are yet to see the benefits of transitioning their strategy to cater for ESG factors. [22] Despite this, the rising environmental awareness and investor appetite for ‘greener’ portfolios is instrumental in the inception of this deal. With ambition to redesign and restructure their core offerings, BP are taking significant steps towards creating a more streamlined and renewable energy focused business. It still remains to be seen how other players in the energy markets will change their strategies and divest from non-renewable activities over the coming years. What we do know is that energy companies will inevitably shift to renewables over time: as of now BP are leading the charge.
Glossary
1 Environmental, social and governance (ESG) factors are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.