Investors Unhappy With BP’s Net Zero Target: Stock Sinks To 25-Year Low

Summary

• The shares of the company touched their lowest value on 29 September 2020 since October 1995
• The dip has been caused by the company’s Net Zero transition plan, which was recently presented by CEO Bernard Looney.
• The British oil major plans to completely erase its carbon footprint by 2050 and concentrate on renewable energy, which many believe is hard to implement.

Europe’s push to make its energy and utility companies adapt to renewable energy resources at an accelerated pace does not seem to be gelling well with the investors. For instance, British Petroleum (BP), the largest oil and gas company in the United Kingdom, recently showcased its plan to progressively reduce its carbon footprint to zero by 2050. Investors though are sceptical about the move.

The plan, which was elaborated in a ten-hour presentation by the company, failed to convince the investors of its practical approach. The company’s claim that it can deliver return between 8 and 10 per cent after the implementation also did not go down well with the investors. It should be noted that BP and several of its contemporary oil & gas companies’ have delivered much higher returns in the past.

Though in the past few months, BP has seen a massive fall in its revenues since March 2020 mostly because of the coronavirus pandemic. Majority of its activities, exploration and production projects have been abandoned. Besides, it is also severely streamlining costs.

Net Zero Plan

BP emits nearly 400 million tons of carbon dioxide per year mostly from its oil and gas business verticals, which is a very large figure. Experts feel bringing down its carbon footprint to zero will be an uphill task by 2050. The company’s plan to progressively replace oil with renewable energy resources would involve a significant amount of investment in technology development as well as resource creation.

The Net Zero Plan is in sync with the UK’s commitment to completely decarbonize the nation by 2050. Several other oil, gas, and utility companies have already announced plans in this regard.

BP had undertaken two other two initiatives in this regard earlier. First was to select, promote, and nurture five most promising companies in the renewable energy domains through its SPV (special purpose vehicle) named Launchpad. Each of these companies would be built into $1 billion turnover companies by 2025.

The second was a venture capital initiative that would run parallel to the Launchpad plan. It was aimed to provide seed-funding to small-sized renewable energy companies.

Investors’ dilemma

Renewable energy is a relatively lower-margin business and the present technical support is not so developed for bulk harvesting of renewable energy.

More importantly, BP does not have a strong technological base to support its endeavour. It may take it several years and a substantial investment to create a sustainable platform.

As a matter of fact, the company's long-term investors have been used to a particular range of returns. A sudden drop in that rate could drive away many of them in search of beneficial alternatives.

The current hit to the revenues of the company, tendered by the pandemic, is expected to take a long time to heal.

Market experts feel setting out on a renewable energy endeavour at this time would only do more harm than good to the company. They have, in fact, termed this move as ill-timed.

Many other companies are going carbon neutral, such as Supermarket major J Sainsbury plc had also pledged £1 billion to become carbon neutral by 2040. The company currently has 1 million tons carbon emissions per year as compared to BP's 400 mt emissions. It has been actively working towards lowering its carbon footprint. It has already brought it down by 35 per cent from its 2005 level.

On similar lines, Swiss coal mining giant Glencore has stated that it will reduce its carbon footprint by at least 30 per cent by 2035.

Likewise, the British utility major Centrica Plc has also pledged to progressively source its electricity production from carbon-neutral resources. It will be moving from raw materials such as coal to non-polluting, renewable resources like solar and wind power to deliver on its long-term objectives.

Share performance of BP plc (LON: BP) is a United Kingdom-based multinational oil and gas company active in all three industry verticals, namely the upstream, mid-stream and downstream sectors. Additionally, it is also present in the renewables space by producing power through solar, wind and biofuel sources.

The shares of BP plc have been on the downslide on the LSE since the beginning of 2020, except for a minor uptrend in June 2020, which was roughly a month after the lockdown was removed in the country.

On 2 January 2020, the shares of the company were trading at GBX 480.85 per share after which dipped to an all-time low of GBX 233.70 per share on 18 March 2020 just before the lockdown was imposed.

Thereafter the shares hit a minor high of GBX 365.75 per share on 8 June 2020, after which they went on a steady downward cycle. The shares of the company traded at GBX 229.30 per share on 29 September 2020 at the day’s close.