The long-term outlook for oil is one of decline.
- Friday, November 6, 2020
Despite the fall in demand for oil and the resulting volatility in Brent Crude Oil prices this year, BP has returned to profit in Q3 having posted a massive US$6.7bn loss in Q2. BP profits in Q3 were US$86m but not surprisingly down from the US$2.2bn in Q3 2019. Crude oil starting the year at a price of US$66pb, fell to US$19pb in April and now trades at US$38pb.
BP Chief Executive Bernard Looney said that ‘despite the challenging environment, the company was performing while transforming’. He also stated that BP will continue to pay a dividend to shareholders.
In line with the UK, EU and now Japan, BP is planning sharp cuts in carbon emissions and to become ‘net zero’ by 2050. It aims to ensure that the greenhouse gas emissions from its global operation, including oil and gas extraction, will not issue any additional carbon into the world’s atmosphere. BP has targeted to halve the amount of cardon it produces by 2050. As part of this strategy BP sold off its Petrochemical business to INEOS for US$5bn in June this year. There is growing alignment for a climate led surge in capital expenditure.
The major oil corporations of the world like BP, Shell, Chevron and Total are down between 40% and 60% this year. With dividend yields of 5% or more these stocks look cheap particularly if the post Covid price of oil starts moving back to anything like US$65pb it was at the start of 2020. At that price oil companies are very profitable.
The long-term outlook for oil is one of decline. BP is forecasting that the demand for oil will peak in 2030 and then fall away rapidly as it is replaced by clean and green energy. With oil production then outstripping demand it will only be the low-cost producers such as Saudi Arabia, that can stay in the market.
Oil corporations have big choices to make. It takes considerable investment to develop new reserves. New oil fields are hard to discover and even more expensive to exploit. If demand is set to shrink an alternative strategy is to stop seeking new fields and run down the existing, in order to gain maximum profit from the current asset bank. The cash flow could be re-invested into clean energy sources such as wind, wave, tidal and solar power giving these oil corporations a life after oil and giving investors a new reason to invest. Alternatively, they could pay out a very attractive dividend for a decade or more.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.