The world is a complex place and, sometimes, you have to change direction if you want to succeed. Fair enough, but when it comes to a $100 billion market cap integrated global energy giant like BP (BP 0.38%), big directional changes shouldn't be a common occurrence. But, here we are again, with BP announcing a new business direction as it released fourth-quarter 2022 earnings. It's one of the big reasons I don't trust BP enough to buy it.
What's changed?
When BP released fourth-quarter 2022 earnings, which were nothing short of spectacular, it also released a corporate strategy update. The strategy update was a separate document, however, and was only referenced within the earnings update. It might have been the more interesting of the two documents, given that strong quarterly results were virtually locked in because of elevated energy prices.
Image source: Getty Images.
CEO Bernard Looney set the tone for the business update, explaining, "It's clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon -- all three together, what's known as the energy trilemma." Trilemma? That sounds bad...
There's a lot going on at BP given its size and industry position. But one of the key takeaways from the business update is that the energy giant is going to invest more money into its oil and natural gas business ("up to $8 billion more into oil and gas by 2030"). The basic idea is that BP's increased investment will help the world transition more smoothly to clean energy while also helping countries ensure energy security. Investors cheered the plan, being that more oil and gas drilling is also expected to lead to stronger profits. The stock vastly outperformed its peers following the business update's release.
All in, it is probably a good call for management to reposition its capital allocations given the upswing in oil and natural gas prices. But there's some additional history here that investors should keep in mind.
That last change... and the one before that
Just a few years ago, in 2020, BP announced a major corporate overhaul in the other direction. It was going to pivot toward clean energy: "Within 10 years, BP aims to have increased its annual low investment 10-fold to around $5 billion a year, building out an integrated portfolio of low carbon technologies," the company said. While "Over the same period, BP's oil and gas production is expected to reduce by at least 1 million barrels of oil equivalent a day, or 40%, from 2019 levels."
I guess BP's management team got that directional change wrong, since it's now started to reverse course. The bigger problem is that the 2020 shift included a dividend "reset," pitched as a way to help the company achieve its new goals, though it was also a way to help mend a debt-heavy balance sheet. In other words, dividend investors got hit hard by the 2020 business overhaul.
And, more broadly, as an investor I'm not pleased when companies make splashy corporate changes only to walk them back a few years later. It suggests that management doesn't quite understand the business environment as well as it should, or that it is simply trying to appease Wall Street. (I suspect the latter is the case here.)
Only this history lesson isn't over yet. We've actually seen this story unfold before, in 2000. Where BP once stood for British Petroleum, at the turn of the century the company announced that the letters would, going forward, stand for Beyond Petroleum. Just like in 2020, it was embarking on a clean energy shift. Beyond Petroleum lasted about a dozen years or so before BP was once again an oil-focused company, selling off most of the clean energy investments it had made during the Beyond Petroleum years.
A troubling trend
It seems to me that BP has a problem sticking to its own clean energy plans. The immense profits that carbon fuels can produce during the industry's cyclical upturns are very hard to resist, so I understand why the company is trying to cash in while it can.
But moving away from a clean-energy goal less than three years after announcing it, after having done a very similar thing in the past, doesn't inspire confidence. There are too many other investment options in the industry for me to take on this company-specific risk.
