BP is getting rid of its 19.75% stake in Russian energy firm Rosneft saying, ''The Rosneft holding is no longer aligned with bp's business and strategy''. The group will no longer recognise Rosneft's income, production and reserves.
Instead, the holding will be treated as a financial investment until it's been sold.
The decision will result in a material non-cash charge in the group's first quarter results. It will be the difference between Rosneft's value of around $14bn, as reported at the end of 2021, and the current market value of bp's stake. It will also include a charge for foreign exchange losses. As of 2021, these totalled around $11bn.
Management continues to expect cash profits (EBITDA) to increase at a compound annual growth rate of 7-9% through 2025, if oil prices remain above $50-60 per barrel.
Giving up Rosneft isn't expected to impact the group's dividend and buyback plans.
The shares were down 6.7% following the announcement.
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Our View
The escalating crisis in Ukraine has given BP reason to separate Russian Rosneft from the business, with the ultimate goal of disposing of it completely.
Finding a willing buyer will be a tricky business in the current climate, though. For now it looks like BP will simply carry Rosneft on the balance sheet as an investment, writing down the current value as it declines.
There's no question this will hurt BP's financial position, but it seems not enough to dent the group's profit and shareholder distribution forecasts. The loss of Rosneft's income will be mostly offset by a $5-$6 increase in oil prices, the likes of which we've already seen in the past few days. For that reason we think it's key to remain focused on the wider operational picture at BP.
Buoyant oil prices are feeding though to massive cash flows, more than offsetting capital investment. It's also allowed some substantial shareholder returns and given the group space to pay down debt.
Indebtedness, as measured by gearing, came down slightly from the third quarter, which was a welcome development. Surplus cash outpaced buybacks, which supports the shareholder returns programme. Buybacks also help keep the dividend affordable. Reducing the number of shares in issue allows the group to maintain or grow the dividend per share. All while holding total dividend expense steady. We should note that current plans rest on the oil price remaining elevated, which BP has no control over. No dividend is ever guaranteed.
Debt reduction and buybacks are also being heavily supported by asset sales. And that's not a long-term strategy. Eventually, the business would slowly devour itself. Instead, the group needs to generate significant and sustainable positive free cash flow by itself.
Legacy oil & gas assets seem to be doing just that for now, helped by the group's decision to trim capital expenditure. But oil & gas companies are capital hungry businesses, if new oil wells aren't brought online, eventually the group's fields will run dry.
So, focussing capital expenditure on lower carbon assets is brave. The group spent $4.7bn on gas and low carbon projects last year, just a hair below what was spent on oil production and operations. By 2030 the group expects to be spending $5bn a year on low carbon energy projects, up from just $1.5bn in 2021.
The new strategy calls for a twenty-fold increase in renewable generating capacity, big increases in biofuel and hydrogen output, increased focus on its petrol station convenience offering and continued investment in electric vehicle charging. Meanwhile the carbon intensity of the group's remaining oil & gas assets will fall.
It's an admirable goal and based on the group's decision to ramp up its targets, it's humming along faster than expected. This more aggressive approach to the transition could prove to be an inspiring one. However, we worry that BP may be swapping high returning, high quality oil & gas fields for low returning renewables with an unproven track record. Neither BP nor the global energy mix will be free of oil & gas products for years to come, and investing in renewables could be a bit of a money pit in the short term. That could make for a difficult few years if oil prices slide.
BP key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results (8 February 2022)
Full year revenue rose 50.5% to $164.2m, reflecting an increase across all segments with gas and low carbon energy nearly doubling. Underlying profit was $12.8bn, up from a $5.7bn loss last year, driven by higher oil and gas prices, improved refining margins.
The group announced a fourth quarter dividend worth 5.46 cents, bringing the total for the year to 21.420 cents. The group also announced a further $1.5bn share buyback.
Assuming an oil price of $60 per barrel, the group plans to increase its dividend by 4% and deliver around $4bn in buybacks each year to 2025.
Underlying profit before interest and tax was $7.5bn in the Gas & Low Carbon Energy segment, up from $689m last year as major project start-ups boosted production by 9%. The group made progress in renewables, with capacity increasing from 1.5GW to 1.9GW.
Underlying profits in Oil Production & Operations rose to $10.3bn from a $5.9bn loss, reflecting higher liquid and gas prices and lower exploration costs. This offset production declines in liquids, natural gas and hydrocarbons due to reduced capital investment.
Customers & Products reported a 5.3% increase in underlying profits to $3.3bn. This reflected flat results from Customers as higher volumes were offset by rising commodity costs, wages and marketing spend. Products saw refining margins improve despite increased maintenance and rising energy costs.
Higher oil prices and foreign exchange tailwinds helped Rosneft underlying profit rise to $2.7bn from $56m. Other Businesses & Corporate posted underlying profits of $1.4bn, up from $882m.
The group completed $7.6bn of asset sales and expects to receive a further $2-3bn in 2022.
BP reduced net debt by $8.3bn, bringing the total to $30.6bn at the end of the year. This contributed to a significant decrease in gearing ,which measures the percentage of operations funded by debt, from 31.3% to 25.3%. Free cash flow, excluding the impact of disposals and acquisitions, rose to $12.7bn from an outflow of $144m.
BP is planning to up the proportion of capital expenditure aimed at transitioning toward low carbon energy to 40% by 2025, increasing to 50% in 2030. It expects this part of the business to generate profits between $9 and $10bn by 2030.
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