BP shares rose 6.7% on Tuesday even after the oil giant cut its dividend for the first time in a decade after reporting a $ 16.8 billion loss in the second quarter.
However, major oil beat expectations and surprised investors by unveiling a new green strategy to cut oil and gas production by 40% and increase low-carbon investment tenfold to around $ 5 billion a year by 2030.
Back history. The second quarter has been miserable for the world’s largest oil companies, as the coronavirus pandemic has seen declining demand and prices falling.
BP (marker: BP) warned in June that it expected charges of between $ 13 billion and $ 17.5 billion in the second quarter, after lowering long-term oil price forecasts and taking steps toward a strategy to become net zero on carbon by 2050. The British energy giant also announced a review of plans to develop some of its oil and gas exploration sites, and said it would cut 10,000 jobs worldwide following the global drop in oil demand.
What’s new. BP numbers reaffirmed second-sector misery in the second quarter as the company fell to a record $ 6.7 billion loss, from a $ 2.8 billion profit a year earlier. The strong performance in its oil trading sector helped it beat expectations.
The London-based multinational lowered its long-term oil and gas price assumptions after warning that weaker energy demand could last for a “stable period”. It now expects Brent crude prices to be between $ 50 and $ 60 a barrel over the next 30 years, up from an earlier estimate of $ 70. As a result, the company received a $ 9.2 billion valuation on the value of its assets, while a review of exploration prospects led to a $ 1.7 billion valuation. BP recorded total losses of $ 17.4 billion.
The quarterly dividend cut – halved from 10.5 cents a share to 5.25 cents a share – did not come as a surprise. The big surprise came early in the year when BP remained at its dividend in the first quarter as rival Royal Dutch Shell (RDS.A) cut shareholder payments for the first time since World War II. For U.S. PB ADR holders, the dividend fell to 31.5 cents a share per quarter, from 63 cents. ADRs still yield about 5%.
Looking ahead. The BP dividend cut was fully expected, so investors largely ignored it. In fact, the 50% dividend cut is less severe than Shell, which cut its payroll by two-thirds in April. The company’s ambitious pivot towards a low carbon future and plans to spend billions in the next 10 years have also attracted attention.
As bad as the second quarter was, BP also managed to beat expectations and report an impressive performance in its trading operations. “The loss that BP announced this morning, related to the signing of its asset valuation, was not worse than analysts had expected, likely causing a relief measure,” said AJ Bell investment director Russ Mold Mold. “And the benefit of being involved in almost every aspect of the oil market was revealed by a strong show of its trade sharing as it took advantage of all the instability,” he added.
Cutting BP dividends and the new green strategy shows that it is finally facing the challenges ahead, but it may not ease those challenges.