“We remain committed to executing our strategy,” said Murray Auchincloss, BP’s stand-in chief executive, for the umpteenth time since Bernard Looney was defenestrated as permanent boss seven weeks ago. Auchincloss’s problem is that repetition doesn’t make it more convincing in the eyes of a sceptical market. Investors were already wondering if Looney would bow to pressure to water down his green transition plans further. Now it’s open season for speculation about BP’s future. Takeover target? Breakup candidate? There is an air of instability.
That is partly because the two biggest US oil majors are seemingly more confident than ever in their hydrocarbons-for-longer strategies. ExxonMobil is buying the US shale group Pioneer for $60bn (£49bn) and Chevron is making a record purchase by paying $53bn for Hess, complete with access to Guyana’s offshore oil reserves. Both deals are a case of doubling down on fossil fuels, which naturally provokes a fresh round of muttering among a few BP investors about whether renewables will ever earn the same returns on capital as oil and gas. BP’s shares are persistently priced at a valuation discount to those of the US majors.
Nor will the mood be improved by the $540m impairment charge in offshore wind in BP’s weak third-quarter numbers on Tuesday, the result of New York authorities rejecting a request to renegotiate terms on two local projects. That will heighten worries about the effect on inflation on other BP wind projects in the UK and Germany.
Meanwhile, if the pursuit of size and synergies is suddenly the game again in Big Oil, some wonder if a takeover by Shell, first rumoured about two decades ago, would fit the bill. Alternatively, the undervaluation might be solved by a demerger, separating the oil and gas assets from the newer low-carbon ventures, suggested Nick Butler, a former BP executive and a visiting professor at King’s College London, on BBC Radio 4’s Today programme on Tuesday.
Anything can happen, of course. But, before joining the rush to declare that BP requires a radical fix or strategic U-turn, here are a few reasons why now looks to be the wrong moment to hit the panic button.
First, BP’s valuation discount to US rivals hasn’t got worse over the past year. There’s still a discount to Shell, but it’s not yawning. Second, it’s not as if Exxon and Chevron have been cheered from the rafters for their splashy deals. Both companies’ share prices have fallen since the announcement of their acquisitions; the market may be worrying that the takeover action is happening at the top of the cycle (it wouldn’t be the first time).
Third, BP’s current strategy cannot be described as a reckless bet-the-farm gamble on renewables. Even by 2030, the company projects that about three-quarters of its earnings will be coming from hydrocarbons. The “transition growth engines” – primarily biofuels, EV charging, hydrogen and renewables generation – are pencilled in for $10bn-$12bn of annual earnings (v about $1.5bn today) out of a group total of $53bn-$58bn at the end of this decade. Oil and gas production in the US, which is roughly what BP means by concentrating on high-quality barrels, will actually increase over the period.
For those investors who still think oil companies can recycle their expertise into low-carbon technology – not everybody is a believer, of course – BP offers the choice of a different blend of assets. The real investment uncertainty is whether the returns from the low- and zero-carbon will materialise. On that score, it’s surely too soon to make a definitive call.
Yes, returns on capital of 15%-plus from biofuels and EV charging sound punchy; “double digits” from hydrogen is speculative since the business is in its infancy; and 6%-8% from renewable power (before financial leverage is applied) comes with a question mark now that the share prices of pure-play wind operators are tumbling. But BP has only been travelling down this long-term road for about three years in serious fashion. Give the strategy time to succeed or fail. If the numbers don’t stack up in practice, the moment for a U-turn is a couple of years away.
Auchincloss, as the interim boss, will always struggle to make the “nothing’s changed” pitch on strategy persuasively. But it’s the right message for now.
