BP: A Primal Scream At Corporate Wokeness

Introduction

I haven't followed BP$BP PLC(BP)$ (NYSE:BP) closely for a while, as I didn't consider them investable. A couple of years ago I became concerned they were losing mission focus-making money, in search of green energy virtue signaling, and lacked commitment in returning capital to their shareholders. I am running an investment-highlighting service on this platform, so I've looked elsewhere for opportunity.

I was put off by use of the term "stakeholder" in the company call where they slashed the dividend, in early 2020. That day I dumped a long standing BP position in the middle $30s, and suggested that members of The Daily Drilling Report do the same. I don't know what a stakeholder is. The term doesn't appear on a corporation's org chart, or should not if it does. I do know what a stockholder is - someone who has invested capital in an enterprise - and knew I didn't want any part of what I felt lay ahead for BP. I took most of that money and bought Halliburton (HAL) - adding to an already open position, at $5ish per share, and exhorted others to do the same in a public article. I also opened or added to positions in Devon Energy (DVN), Occidental Petroleum (OXY), and a few others in the half year that followed. I've done alright since.

Opportunities in the energy space have been abundant the last couple of years, and we have done well. Many of the companies presented here have risen 200-300% over that time. Some have risen quite a bit more as we will discuss.

BP has doubled from the lows in October of 2020. About half of that gain came prior to 2022. There was another pop higher in early January of this year, and then shares have been essentially flat from then to now. At last count the company has received about 15 buy or strong buy recommendations from some of the top writers on Seeking Alpha, and that drove my interest in taking a fresh look at the company.

In my last article on BP, I suggested avoiding them and buying just about anything else instead, but in particular, Devon Energy. I did give BP a Hold rating for steady to gradually rising income, if that's all an investor cared about. That's turned out to be a pretty good call, and one I've recently reiterated. Since October of 2020 DVN is up almost 8X, and about 100% since the time of the last BP article. I am glad I bought DVN.In this article, we will review recent data for BP, and see if we should modify our neutral stance on the company. Occasionally I may "channel" Sam Kinison's delivery style as we go through the hurdles here. Sam was an effective communicator, and took no pains to hide his feelings about a subject. Among other things, he proved a primal scream is worth about 10,000 words in visceral impact. Let me explain.

Sam Kinison and the Primal Scream

I realize that I am dating myself a bit with this reference. Most of you will never have heard of Sam. Sam Kinison was a comedian - the King of Observational Humor long before anyone ever heard of Jerry Seinfeld, with a unique punch line delivery style. He screamed it at the top of his lungs. And, then he would keep on screaming until he ran out of air. At which point, he would inhale... and you guessed it, scream some more. It was fall-down, hold your sides in hysterical, and he had audiences laughing until they... well you know. They don't make 'em like Sam anymore, and more's the pity.

My point in drafting Sam's memory in this piece is that people are too passive these days at the corporate "woke-ocity" going around. Too nice, perhaps thinking, "it's just a phase they're going through." I don't think that's the right approach. As a result of this passive attitude, however, there is a lot of stuff going on now, in boardrooms and corner offices, that if someone had just screamed bloody murder the first time, might not have grown legs and walked. Sam, if you're still looking down at the silliness of the world you left behind-far too soon, this one's for you! You are missed.

The core problem with BP as an investment

The essential thesis of many authors is that BP is navigating the energy transition to so-called, "clean energy" well, and represents a discount to valuation at present prices. Somehow these writers manage to avoid squaring up with the fact that the stock has underperformed in the past year, rising about 20% from the mid-$20s, while many other companies in the E&P space are up 50-75%. My hunch is that the market is suggesting to investors that BP's focus on alternative energy is affecting their reserves replacement, which is the traditional source of oil company wealth.  As you can see from the graph above, they have been doing an abysmal job of this, with current proved reserves about where they were in 2011. People should be howling at this graph, "WHERE IS MY OIIIIIIIIIL? WHAT HAVE YOU DONE WITH MY OIIIIIIIL? I GAVE YOU MY MONEY. WHERE IS MY OIIIIIIL?"

Bloomberg estimates thatRosneft's proved reserves are 38 bboe.If true, that would make BP's 20% share about 7.6 bboe, using simple math.Now simple math is only adequate for the most cursory of analyses, but it's good enough to make a simple point.

As noted in theirQ-1 filing, BP took a charge of ~$25 bn which reflected the valuation of Rosneft shares at the time and a writedown of the foreign exchange losses associated with the investment. I would just note here, there may be other shoes to drop with regard to reserves adjustments as this figure is not reflected in their most recent earnings release. I don't know about you, but the fact a company just lost as much as 7.6 bboe is kind of a big deal in an investing decision.In the case of BP, I don't care about cash flow. It's great this quarter, so what? I don't care about debt, nor any of the other metrics we normally apply to companies we cover. I only care about reserves replacement when it comes to BP.It's the only thing that makes them any money.Money that as we noted in our last article, the company has been diverting to growth in its clean energy segment, money that was earned in its upstream petroleum segment.

Bernard Looney, CEO of BP, talks a good game. Here is an excerpt from the call in response to a capital allocation question -

Yes, the world needs cleaner energy, but it also needs energy that's reliable or secure, and it needs energy that is affordable. That is the energy trilemma and the role of an integrated energy company is to solve that trilemma.

Now how do we do that? We do that by investing in hydrocarbons today, and you see us doing that, with the majority of our investment today going into hydrocarbons. And we do that at the same time, not or at the same time by investing in accelerating that energy transition.

And we invested probably about 3% of our capital in 2019 in non-hydrocarbons by 2025, which is just a few years away, over 40% of our capital will go into non-hydrocarbons and that number will be 50% by 2030.

"Yes, the world needs cleaner energy," he avers, calling it the "energy trilemma."Investors should be, and perhaps are, catatonic hearing that word salad. A couple of paragraphs later he reveals the part that really carries some weight. The part that says where 50% of BP's capex will be going in eight short years. "Non-hydrocarbons." It's like they now feel free to say the quiet part, out loud.I don't believe it. "CLEANER ENERGY, NON-HYDROCARBONS???? WHAT THE HECK ARE YOU SPENDING MY MONEY ON?" I know the capital structure of stock companies. That is my darn money - fractionally of course - that Bernard is spending.

BP's plan is to continue taking the money they make selling oil and gas (diminishing quantities of oil and gas, I might add) and shift into ventures with a completely untested track record. Ventures like wind, solar, retail electricity sales, and hydrogen, from which they make little or no money now, and can only estimate when returns will roll in.There's the quiet part again. On the slide above, BP estimates that somewhere between 2025, where they don't expect to earn a dime... uh, shilling... farthing... whatever, in clean energy, and 2030, they will be generating $2-3 bn a year in EBITDA from Low Carbon Energy. (Insert primal scream here).

You don't to need to look any further to figure out why investors are not assigning a higher multiple to BP's shares.

What have they been up to recently?

In resilient hydrocarbons (what they call their legacy oil and gas business), they have started up the satellite well, known internally as theHerschel Expansion major project in the Gulf of Mexico. I put that in italics as when I first read it, I thought we had a new Mad Dog level, host platform going into the water. The language is confusing as Herschel is a single well, tied back to the 20-year old Nakika Semi.I am holding the sides of my head and getting ready to scream at this revelation.They have also signed a deal to combine their Angolan assets with those of Eni through thecreation of Azule Energy.

BPpartnered in an oil discoveryin Brazil where evaluation is ongoing. They have expanded their biofuels business with an 18-year agreement with Copersucar to supply around1.6 million tons of LNGper year from 2025 and began recycling used cooking oilto make aviation fuel, starting production of SAF at the Lingen, Germany, refinery. They have also signed a similar deal with DHL.

They began a new partnership in EV charging, launching a strategic partnership with Volkswagen Group (OTCPK:VWAGY), a car company with a worse stock profile than BP's, to roll out an EV fast charging network in Europe and the U.K., and announcing plans to invest £1 billion (I wonder who's supplying the billion, VW or BP?) over the next decade to support the rollout of fast convenient charging infrastructure across the United Kingdom.

Food delivery.Talk about hitching your wagon to a star! In a surefire, can't lose strategic move, BP's getting into the food delivery business. They have signed a global strategic conveniencepartnership with Uber, aiming to make more than 3,000 retail locations available on Uber Eats by 2025. Uber Eats? How's that working for Uber (UBER) anyway? Hmm. How about DoorDash (DASH), another big food delivery company?If I owned BP, I would probably need a defibrillator at this point. (Insert primal scream.)

In low carbon energy, they welcomed a new Climate EVP, Anja Dotzenrath, an engineer with miss and hit credentials in the renewables business. A CEO stop atE.ON renewables2017-19 where she took the stock price from $11.37 to $10.31. Then another CEO stop atRWE renewableswhere she booked a gain, the stock rising from $27-$44ish.

Then there is more wind. BP increased its position in offshore wind with the ScotWind lease option award of around 1.5 gigawatts net. As noted inBP's release, this project will suck away $1.2 bn in capital on its way to FID in 2026. BP and its JV partner target operations some 7 years hence. I can't hold it back any longer, "SEVEN YEARS!?!?!?! HAVE YOU LOST YOUR MIND??!?!?!? YOU'RE TAKING MY MONEY AND THROWING IT DOWN A RABBIT HOLE FOR SEVENNNNNNNNNN YEARS. NOOOOOOOOOOOO."

And then there's more wind. BP announced an agreement to form an offshore wind partnership with Marubeni in Japan. Green hydrogen was not left out. They announced plans for a 250-megawatt green hydrogen project in Rotterdam, the Netherlands, and signed an agreement to form a joint venture with Aberdeen City Council to develop a hydrogen hub there.

CEO Bernard Looney is quitechuffedabout all of this-

As you can see, we have real momentum. We are executing our strategy, delivering real progress across our five transition growth engines, EV charging, convenience, bioenergy, renewables and hydrogen, as we transform to an integrated energy company.

BP Q-1 financials

Thanks to higher oil prices they are making a ton of money, with OCF at $8.2 bn in Q-1, half of which was a build in working capital. Record cash flow is hardly a singular achievement these days. Long term debt remains at $55 bn from the prior quarter. BP repurchased $2.5 bn in stock and has authorization for another $2.5 bn. Capex was $2.9 bn against an annual projection of $14-15 bn, and they are targeting 60% of excess cash flow to share buybacks.

All of this is nice.I just don't care. Everybody's throwing cash at me these days, without all that debt to lug around. I like clean or improving balance sheets, having had enough fun with the "growth at any cost" shell game played by oil companies a few years ago on their way to bankruptcy court. These fundamentals can change on a dime as we have learned. I only care about reserves replacement.

Your takeaway

BP is trading presently at less than 5X OCF. There's nothing wrong with that, except it's right in line with companies holding a ton less debt that have their mission emblazoned on the front door. Occidental Petroleum is trading at 6X OCF, slightly higher, but in a range.

On a flowing barrel basis, BP is selling at $63K a barrel, and this metric will deteriorate over time asthey exit the oil and gas business. OXY for comparison sells for $43K per flowing barrel. How about reserves?

BP trades at 50X future cash flow from current reserves. OXY trades at just over2X P2 reservesat $60 per barrel. It looks like OXY is the better deal to me.

I only care about reserves when it comes to BP. If they were to add significantly organically or inorganically, I might change my stance. At the present, I maintain my stance that management of BP is out of touch with the retail shareholder, and regular people, folks like you and I, gentle readers, can do better. We are doing better.

We lower our rating on BP to sell.