“We’re a cash machine at these types of prices,” said the BP (LON: BP) boss Bernard Looney. He was referring to the price of Brent crude oil, trading at $82 a barrel.
At the current oil price, BP is generating cash, and although it made a paper loss in the last quarter, the underlying profit was $3.3 billion.
The company ticks three boxes: it is making a lot of money, it pays good dividends, including special dividends, and is investing in renewables.
They call Mr Looney the Instagram CEO — he certainly seems to like taking to the social media platform to trumpet BP’s green credentials.
But I have concerns.
It is not a simple task that lies before BP. The various ESG indices don’t seem to like the company or any oil companies, but I wonder if they are being fair. What do the ESG people expect an oil company to do? And to what extent can you blame oil companies for climate change, and to what extend can you blame industry and consumers for using the black liquid?
In any case, BP was an early pioneer amongst the oil companies in trying to shift emphasis away from the carbon fuel; remember how it used to call itself Beyond Petroleum.
But that takes me to my concern. It is not that I doubt Bernard Looney’s heart is the right place; it is that I think he is fighting a tough battle.
The renewable revolution has occurred much faster than most expected. Famously, the International Energy Agency has consistently underestimated the renewables takeup.
The major oil industry players are lagging behind because they failed to grasp the rapidity with which renewables would grow. I think they are still making that mistake.
BP shareholders demand a juicy dividend. But significant dividends are paid by companies operating in mature industries; or those operating in dying industries with no long-term plans. The oil industry is a dying industry; within a decade or so, oil assets will be stranded assets. Yet BP continues to fork out big dividends. Does it plan to be a significant player in the post Cop26 era when renewables and related technologies disrupt the oil industry? If it does want this, then BP should plough more of its cash pile into future technologies.
The FTSE 250 alternative.
In a way, recent problems at Johnson Matthey (LON: JMAT) illustrates my above point. It has been trying to carve out a niche for itself in lithium-ion batteries since 2012.
Even so, it wasn’t forward-thinking enough, and now the company is pulling out of lithium-ion batteries. Instead, catalytic converters are a vital part of the business, hardly an area with strong long-term potential.
But I reckon Johnson Matthey has made a smart move. Incoming CEO Liam Condon will benefit from a potential £340 million new war chest from selling the lithium-ion businesses, focusing on decarbonising its chemical supply chain and its hydrogen project. (Although as a note of caution, it is worth watching to see what price it gets for the business)
I think the company is ahead of the field. Hydrogen will become a vital energy source, such as energy for blast furnaces, long-distance flights, and heavy-duty transport. But the problem with hydrogen concerns how it is created. There is brown hydrogen generated from coal and bad for the environment. Then, there is blue hydrogen, generated from natural gas. The jury is out on how clean blue hydrogen is, but a recent, and widely cited paper, cast doubts on its green credentials.
Then again, in 2010, lithium-ion batteries were extremely expensive; furthermore, their cost has fallen 97 per cent since 1991. I think green hydrogen will mirror the lithium-ion story.
Green hydrogen has an exciting future, and unlike the Johnson Matthey of 2012 and the BP of 15 years or so ago, I think that Johnson Matthey has got the hydrogen timing right. The recent fall in its share price creates an added opportunity for investors.