BP (BP.) produced some great financial results yesterday and the share price rose 8% on the day and is still rising. Other oil companies rose in unison. What I particularly liked as a holder was the improvement in Return on Capital which is forecast to grow to 18% in 2025 and 2030. This is after many years of quite mundane returns when I judge such a metric to be a key factor in any investment decision.
With increasing share buy-backs and dividend increases you can see why shareholders are happy. Their view might also have been affected by the following comment from the company CEO: “It’s clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon – all three together, what’s known as the energy trilemma. To tackle that, action is needed to accelerate the transition. And – at the same time – action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it’s needed today”.
He is in effect saying that BP will continue to invest in oil/gas production while also investing in “transition growth engines” which includes “bioenergy, convenience and EV charging, hydrogen and renewables and power”. Production of oil/gas will be around 25% lower than BP’s production in 2019, excluding production from Rosneft, compared to the company’s previous expectation of a reduction of around 40%. BP correspondingly now aims for a fall of 20% to 30% in emissions from the carbon in its oil and gas production in 2030 compared to a 2019 baseline, lower than the previous aim of 35-40%.
It is good to see that reality has crept into their plans and forecasts. But the company’s results are clearly very dependent on the price of energy whose cost has shot up sharply because of the war in Ukraine, There is a worldwide energy shortage and investors should keep a close eye on trends in that market if they hold companies such as BP and Shell.
There was an amusing post on Twitter by Philip O’Sullivan pointing out that the Annual Report of Shell in 1944 was all of 8 pages long – see first page above. Last year it was 359 pages!
That would be a good example for Shell and other companies to follow when annual reports are now way to long and voluminous in most cases. This is partly down to increased regulation and expanded accounting standards driven by increases in bureaucracy emanating from the Government BEIS Department (“The Department for Business, Energy and Industrial Strategy”). For many years this used to be called the Department of Trade and Industry (the DTI) before politicians decided it was a good idea to rebrand it.
Now the Government has decided to split it up into three new Departments to be called “the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero, and the Department for Business and Trade”. What the benefit of this restructuring will be is not at all obvious and the name “Department for Energy Security and Net Zero” is a particular oxymoron as aiming for Net Zero is not going to improve energy security.
The downside is likely to be another year of musical chairs for civil servants in these departments when one of the issues is lack of continuity of expertise in specialist areas of government such as company law and stock market regulation.
Shuffling responsibilities does not help.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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