The wise bet in the early days of cars was to short pony traps rather than try to pick the winners. So said Warren Buffett.
The smart bet today may not be to buy shares in Tesla but short oil and gas stocks, even those reforming such as BP.
On Wednesday, BP’s new broom Bernard Looney, who does not own a car, proclaimed his ambition to make BP greener. The traditional upstream and downstream divisions are being abandoned. The words oil, exploration, refining and chemicals have been dropped from BP’s organisational structure. The group is promising net zero emissions in oil and gas production as well as to halve the carbon intensity of its products within three decades. It also promises to increase investment in alternative fuels. “Over time”. Key words those.
Mr Looney is playing the right tune. Big oil groups must do something. Capitalism is transforming. Climate change is suddenly centre stage. Customers want electric cars and ecologically sound fuel. Investors are shovelling money into renewable energy.
For now rates of return on oil and gas exceed those from alternatives, say lawyers CMS and Capital Economics. But not forever. Costs of capital are falling for alternatives and rising for what was once called black gold. In years to come, majors will have to write off billions of reserves of hydrocarbon assets because burning them will exacerbate climate change.
If temperature rises are restricted to 2 degrees Celsius above pre-industrial levels à la Paris agreement, oil majors will have to write off half their assets, according to analysts. If the temperature cap is lower at 1.5 degrees, four-fifths of hydrocarbon assets could be worthless.
Mr Looney said himself on Wednesday, that to keep to a 2 degree temperature rise, spending on renewables must rise from $300bn to $1tn. To keep to 1.5 degrees, the spending lifts to $2.5tn.
That means a massive shift for BP. It produces more than 3m barrels of oil equivalent a day, which ranks it fifth in the world in terms of production — behind Gazprom, Rosneft, ExxonMobil and PetroChina, and a couple of places above Royal Dutch Shell. Yet BP spends 3-5 per cent of its $15bn annual capex budget on renewables. Many in the industry spend less and emit more. But it is a fraction of Shell’s outlay on alternatives. On Wednesday Mr Looney sidestepped any commitment to “an arbitrary or pre-set number” on renewable spending, saying the goal is “not to spend more money, it is to invest wisely”. The reality is BP needs to lavish gazillions, possibly through acquisitions, to pick winners and move the needle.
Mr Looney’s unenviable dilemma is how he will square that with BP’s promises to keep paying a juicy dividend and reduce gearing below 30 per cent this year. As the Sage says, better to short the trap.
N26 abandons BS
Bye for now, N26. After 18 months, the German digital bank has had it with the UK. Brexit is ostensibly to blame. N26 has a European banking licence, not a UK one. Staying means further regulatory palaver. All UK accounts will be closed in two months’ time.
But in October N26 was reassuring Brits of its post-Brexit commitment. The bank’s “banking without the bullshit” slogan didn’t chime with UK customers, who quite liked banking bullshit, or at least less Germanic directness — according to N26’s UK general manager Will Sorby last year.
N26 may be one of the new breed of digital challenger banks. But it has learnt an old lesson. It’s tough out there. Challenging Britain’s incumbent big high street banks is not easy, as others including Metro and the Co-Op have found out. J Sainsbury, too. N26’s announcement, on Tuesday, came a day before Sainsbury’s Bank said its chairman since 2013, Roger Davis, was stepping down. This is the man who gee-d up the bank for growth after it was bought out from a joint venture with Lloyds. Now Mr Davis is following chief executive Peter Griffiths, who left last year after seven years in charge.
Seven years is four times longer than N26’s UK foray. Yet Sainsbury’s failed to make its bank a success. Nick Coulter, a Citi analyst, estimates the grocer has spent £1.6bn on the bank since 2013. In 2013-14, it made £56m in prettified pre-tax profits rising to £68m by last year. An unsatisfying return on capital spent. Its cost-to-income ratio, a key measure, was 63 per cent — on a par with Barclays, which has investment bankers to pay.
Sainsbury’s Bank’s new boss Jim Brown is taking it out of standard but unprofitable products such as mortgages and shrinking it to a core of store and credit cards.
Supermarket banks have been superseded by apps for customers looking for a different online banking experience. There are plenty to choose from. But the likes of Revolut, Monzo and Starling will find it just as tough as N26 and Sainsbury’s have done.
Get alerts on BP PLC when a new story is published