By Chris Hughes

(Bloomberg Opinion) The market was surprised when BP Plc didn’t cut the dividend in April in response to the worsening pandemic. Now that the U.K. oil major has brought the payout down by 50%, one element of the hesitation is clear: BP wants the cut to be understood as the cornerstone of a new financial strategy and not simply a response to Covid-19.The strategy shows BP is not content to be a dead-end income stock, and aspires to be a low-carbon energy group that promises growth. The question is whether it can deliver on its aspirations.

A reduced dividend was unavoidable if BP was to invest more meaningfully in the energy transition. There is no plan to rebuild it: The level is now fixed. On the flip side, the payouts, costing about $1 billion a quarter, now make the first claim on BP’s cash generation, ahead of cutting debt and funding capital expenditure.

Yet BP needs to do more to strengthen its finances post-Covid. To arrive at a comfortable level of leverage it wants to get net debt down to $35 billion, from $41 billion. It also has ambitious investment plans. Hence BP is planning to raise $25 billion from asset sales. The second quarter was clearly exceptional, but organic free cash flow would not have covered even the reduced dividend in the period, let alone everything else.

It’s a fundamental financial reset, saving cash by paying shareholders less and raising cash by jettisoning hydrocarbon assets. Cleaner energy and forecourt investments will absorb about one-third of future capital expenditure. Oil and gas production will fall by about 40% over the coming decade. Low-carbon electricity capacity will grow 20-fold. Electric vehicle charging points nearly tenfold.

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Can BP can earn returns on this? As UBS Group AG analyst Jon Rigby points out, the impairment charges announced at the same time as the strategic reset are an embarrassing reminder that BP has misjudged past investments in oil and gas — where it’s an expert. How can it do any better in renewables? New Chief Executive Officer Bernard Looney is adamant that BP has tremendous assets to bring to bear in the transition — teams of scientists, project-management skills, global reach, close customer relationships.

Indeed, BP thinks the strategy will actually improve returns on capital, from 9% last year to 12-14% in the future. This is ambitious. The secret sauce is to package clean energy with other services — for example, fixed-priced contracts for customers, using BP’s hedging expertise, or perhaps energy contracts for big corporations that include renewables in the mix but also guarantee security of supply.

BP is of course absolutely right to curtail its investments in planet-warming fuels. Having taken away half shareholders’ payouts, Looney’s tenure as CEO will be about proving he knows best how to spend that cash.