There’s a reason for BP‘s (LSE: BP) new and heavier emphasis on green energy.
It is not just that producing more renewables good for the environment. It also gives the oil giant an opportunity for growth. BP believes renewables will grow faster than any other energy source in the medium term. The company sees renewable shares rising from 4% of all primary energy in 2019 to an estimated 15% by 2040.
The price of oil has been a poor performer over the past 10 years. There are predictions that oil demand might have already peaked last year. So, perhaps trying something new is the right idea. This assumes good execution, of course.
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Given that BP is planning this push into low carbon energy, here is a closer look at how the company is trying to do more business in the sector.
How BP is trying to go ‘green’
While BP has emphasized green energy before, it is now planning to spend a lot more money than before in the sector. In terms of expenditures, BP recently disclosed an ambitious ‘10-fold’ increase in its low carbon investment budget, to around $5bn a year within a decade.
As a result, the oil giant expects to have substantial renewable energy operations by 2030. Specifically, the company targets bioenergy production of over 100,000 b/d, developed renewable generating capacity of 50GW by 2030, up from 2.5 GW in 2019, as well as a substantial hydrogen business.
BP also plans to adjust to the electric vehicle age. In addition to its traditional gas stations, the oil giant plans to increase the number of electric vehicle charging points to 70,000 by the beginning of next decade, from around 7,500 now.
As a result of investing more in green energy, BP believes it will reduce its emissions from operations by 30% to 35% by 2030, as well.
The expected returns of going green
BP management expects to generate a more sustainable return by going green.
In terms of the specific numbers, management expects to “diversify and improve the resilience” of its cash flow. In conjunction with its existing operations, management expects to have an average compounded annual growth rate of 7% to 9% to 2025 in terms of EBIDA per share.
I think BP’s green pivot is a great idea. Although transitions can be difficult, I think it’s better to get started earlier rather than later when it comes to adjusting to a long-term trend. By starting earlier, a company could potentially have more opportunities to gain economies of scale and advanced tech. A company would also have more experience which could improve efficiency.
Given that China has committed to going carbon neutral by 2060, there will be a lot of demand for green energy. As a result, I think there is also potential for outperformance if management executes well. If BP succeeds with its green ‘pivot’, I think the stock could garner a higher valuation in the long term.
