BP vs. Total: Which Oil Company Is Better Positioned for a Green Energy Transition?
European oil giants BP (NYSE:BP) and Total (NYSE:TOT) have both taken stands on clean energy, with each pledging its support for alternatives to oil. However, there’s a notable difference in the business trajectories these integrated energy giants are taking. Here’s a look at what the companies are doing, and what it could mean for investors.
The quick change artist
In August, BP cut its dividend in half. For dividend investors that was terrible news, but it was, to some degree, a sign of the times. The economic closures used to slow the spread of COVID-19 earlier in 2020 led to a massive drop in demand for oil and natural gas. With excess supply piling up in storage, energy prices plunged, and BP’s top and bottom lines went along for the ride. However, there was more to this cut than meets the eye.
Around the same time, BP announced it had a new business strategy. Basically, the global energy giant is shifting toward clean energy. That keeps it in line with current feelings toward carbon fuels as the world grapples with fears around climate change. However, it’s a big change for an oil company to go green. For starters, BP intends to cut its oil and gas production by 40% by 2030, less than 10 years from now. Meanwhile, it wants to make a 10-fold increase in the number of electric vehicle charging points it owns, and a 20-fold increase in the amount of clean energy it produces. By 2030 40% of the company’s capital spending is likely to be dedicated to low-carbon and clean-energy businesses.
This is a “jump in with both feet” approach. If something goes wrong along the way, there’s not much fallback room. The problem with this is that BP is one of the most heavily leveraged oil majors, with its roughly 1.1-times debt to equity ratio above those of all of its major peers. So it doesn’t have much wiggle room. And it’s counting on the oil business, which it will be shrinking, to fund its clean energy push. If oil’s price recovery is slower than expected or there’s lingering industry weakness, it could be hard for BP to generate the cash it needs to cover its debt load and its new business plan.
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