By Javier Blas
By appointing its former finance boss as its new chief executive officer, British oil giant BP went for continuity — but it needs revolution.
The board is turning to capable hands to run the company today. But what about the next five years, let alone the following decade?
Murray Auchincloss, a 53-year old Canadian, replaces Bernard Looney, who was dismissed last year for “serious misconduct.”
Auchincloss was quick to emphasise constancy. “Our strategy – from international oil company to integrated energy company, or IOC to IEC – does not change,” he said in a statement following his promotion.
Along with many other companies, BP loves to reinvent its brand. For a time, it marketed itself as Beyond Petroleum. Along the way, it switched from capital letters to lowercase because, company lore says, focus groups indicated that “bp is friendlier than the old imperialistic BP”.
Now, it’s an IEC, whatever that’s supposed to signify. Surely, some branding consultant is making bank playing scrabble with the shareholders’ money. I wish BP would stick to what it knows — petroleum. It may not be politically correct, but it pays the dividends.
Which brings us back to the strategy. BP directors and senior executives insist the current business plan is right. I disagree, but that’s irrelevant. What’s crucial is that the market also disagrees.
Minutes after BP announced the CEO appointment, its shares fell to the lowest since October 2022. True, oil and gas prices were down, so the fall was in line with the market. But there’s a much larger trend. Of the five top international oil and gas majors, BP is the only one whose shares are down from their early 2020 level, just before the pandemic hit.
From a shareholder point of view, the past five years has been largely a washout. Including re-invested dividends, BP has generated total returns (measured in sterling) of 14.95 per cent since January, 2019. Using the same metric over the same period, Exxon Mobil has delivered total returns of 81.76 per cent; Chevron of 64.67 per cent; Shell of 30.89 per cent; and Total Energies of 70.17 per cent. Maybe BP directors know something the market doesn’t; or, perhaps, they’re just wrong.
Looking at the past five years may be unfair because BP has already tweaked its strategy since, reducing the emphasis on reducing oil and gas production. But today’s financial indicators aren’t rosier, either. On a price-to-earnings basis, BP shares trade at a lowly 3.9 times ratio, compared with 7.1 times for Shell and 8.1 times for TotalEnergies.
Exxon and Chevron trade at 9 and 10 times, respectively.
Why are investors so down on the company? Look at the numbers underpinning its business plan.
Even after re-adjusting its strategy a year ago, BP is spending generously on lower-return projects outside its core oil and gas businesses. As a result, it needs a high — and rising — oil price to sustain the payouts shareholders have become used to.
Fortunately, Auchincloss did say on Wednesday that “focusing on returns” was a priority. Good. There’s hope.
The problem is that the poor performance in the equity market comes even as oil and gas prices have stayed at relatively healthy levels. Brent crude, the global benchmark, is trading above $US75 a barrel. What happens during a downturn?
As a former chief financial officer, Auchincloss will be attuned to balance-sheet dangers BP could face if oil and gas prices drop.
Debt, already elevated by historical standards, would increase, pressuring its credit rating. Share buybacks would go; dividends would fall. The hope is that he quickly recasts the strategy, going beyond the changes that his predecessor Looney started in early 2023.
Back in October, when Auchincloss was still interim CEO, he updated investors on how BP would spend its money, setting out a list of priorities.
First, the dividend; second, maintaining an investment grade credit rating; third, investing in its so-called transition businesses; fourth came oil and gas; and fifth was share buybacks.
I’d prefer that he merged three and four in one single bucket: investing in the company’s business, and selecting where exactly to put money solely based on risk-adjusted returns.
If not, BP faces another kind of danger. Its market value has already dropped below $100 billion, less than half the peak of $250 billion set in 2006. At its current valuation, BP is a clear target for an activist investor looking to shake up the board and change the company’s strategy.
Alternatively, it could be prey for a mega takeover. Either alternative could offer a better future to shareholders than the current strategy.
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Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.” @JavierBlas. Energiesnet.com does not necessarily share these views.
Editor’s Note: This article was originally published by Bloomberg Opinion, on January 18 , 2024. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.
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EnergiesNet.com 01 22 2024
