BP’s US wind sale won’t clear its strategic fog

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What is BP, where is it going and what is it trying to be? These sound like basic questions, but since former chief executive Bernard Looney laid out an ambitious energy transition strategy in 2020, investors have not always been clear on what the European oil major is doing and why.

No doubt Murray Auchincloss, who was appointed permanent chief executive in January, would argue that he has been clear about BP’s strategic direction, even if its transition to an integrated energy company has been altered from Looney’s original blueprint.

Auchincloss is simplifying and focusing a lot of BP to deliver on its promises to become a “higher value company”. In glossy marketing material, he says he is focused on achieving BP’s 2025 targets for profits and shareholder returns “and we are confident”. The problem is that the market is not.

To be fair, Auchincloss is exiting businesses that no longer make sense. There have been several divestment announcements this week, including BP’s plan to sell its US onshore wind business, which owns 10 wind farms operating in seven states. In total, the assets have a generating capacity of 1.7 gigawatts, of which BP’s share is 1.3 GW.

BP began developing its US onshore wind business in the mid-1990s. These are non-core, mature assets that will eventually require more investment if existing turbines are replaced with newer, more powerful designs. Given their age, they are unlikely to get the roughly $2 billion implied by a standard $1.5 billion per gigawatt valuation for new wind farms.

Auchincloss’ care work does nothing to stop BP’s share price from falling. The drop in oil prices has taken a bite out of all energy companies. Still, BP is underperforming rivals as investors worry about its 2025 promises: its goal of generating total group ebitda of $46 billion to $49 billion by 2025 (vs. $44 billion in 2023) was set in the second half of 2023, when oil prices were still above $80.

With oil pulling back, it is increasingly unclear whether BP will be able to meet its guidance to provide investors with an additional $7 billion in share buybacks in 2025. These capital returns have served as a useful sweetener, in while BP tries to convince its energy transition strategy. it will come good.

The lower cash flows, as Lex has already argued, will force all the oil companies that have relied on nanny yields to find a new story to win over investors. The problem is that BP was already a pretty unconvincing story.

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