If there’s an all-hands-on-deck response at the oil major’s headquarters, that message seems to be lost in translation for concerned investors.
Murray Auchincloss had a clear message to his shareholders days after becoming chief executive officer of BP Plc: “I’m focused on growing the value of BP.” Nearly six months since his promotion, however, the promised improvement is nowhere to be seen.
BP’s market value this week fell to a two-year low of roughly £75 billion ($96 billion). Worse, the company is worth today about the same as it was 25 years ago, when oil changed hands at $10 a barrel, rather than today’s price of more than $80 a barrel. BP is a shadow of the mighty oil behemoth it once was.
It would be unfair to blame Auchincloss — who celebrates six months on the job next Wednesday — for all the problems. Some predate him, particularly the cost of cleaning up 2010’s US Gulf of Mexico spill. Yet the Canadian executive isn’t new to BP’s upper echelon. He was chief financial officer from mid-2020 until his promotion in January, and as such, key to the green strategy that the company adopted four years ago.
What’s not unfair is to highlight that Auchincloss’ business-as-usual attitude, his insistence that “our destination is unchanged,” is unnerving many investors. BP’s shares have underperformed all its rivals, in some cases by a large margin. Profit is weak, and the debt load remains high. By now, there should be an all-hands-on-deck emergency at BP’s St James’s Square headquarters. If there is, shareholders haven’t heard about it.
Big Oil Laggard
The shares of BP are trailing their peers since the company launched in February 2020 a new strategy that shifted investment into green energies
Another worrying perception among investors and industry observers is that Auchincloss is an accidental CEO — he stepped into the job after BP’s board fired his predecessor, Bernard Looney, for “serious misconduct”— rather than one who sees his role as reshaping the company for the longer term. Perhaps that perception is erroneous. Certainly, Auchincloss isn’t a brash executive à la some American oil tycoons, but that doesn’t mean he isn’t 100% in charge. Thus it’s urgent he shows he has the chops to redo BP. Insisting that the destination is unchanged, barring some tweaks, won’t help — because I believe the British oil major is on borrowed time. High debt combined with oil price cyclicality are big enemies.
BP is the most indebted compared to its size and cash generation among the Big Oil companies — a group that includes Exxon Mobil Corp., Chevron Corp., Shell Plc and TotalEnergies SE. On a cash generation-to-debt basis, BP stood at nearly 40% at the end of 2023, well below its international peers, each reporting more than 75% on the same date, according to data compiled by S&P Global Ratings. The credit rating firm recently cut its view on BP to “stable” from “positive.”
Until now, the indebtedness hasn’t mattered as much because Russia’s invasion of Ukraine in 2022 triggered a super spike in oil and natural gas prices, as well as boosted refining margins. On top, the price volatility of 2021-2023 created rewarding trading opportunities — a corner of the market BP and Shell dominate.
But now that cycle is ending. Oil is struggling to sustain the $80-a-barrel level as the OPEC+ cartel starts to increase production from later this year; natural gas prices are much lower than they were during the European energy crisis, and refining margins and trading profitability are down.
Large Burden
BP carries a significant net debt load, which looks even larger when compared with its ability to generate cash from its own operations
The tailwind is gone for BP, but thankfully it hasn’t yet turned into a proper headwind. But that could come. Over the last decade, Brent crude has averaged $67 a barrel, about 30% below current levels. Even excluding the months when prices were affected by the pandemic, Brent traded below $70 a barrel for much of the past 10 years.
When, rather than if, oil prices decline, BP would be far more exposed than its rivals. Without the ability to cushion the blow by taking on more debt, buybacks will stop, and dividends may drop.
Since Auchincloss became CEO on Jan. 17, the company’s stock is up just 1.5%, compared with increases of between 7% and 20% for its main rivals. The gap is far larger when looking since the company adopted its green strategy in February 2020, which involved big investments in renewables at the expense of oil and gas projects. Since then, BP’s shares are down about 4%, while its Big Oil rivals are up 35% to 80%.
Auchincloss seems aware that things need to change. Timidly, he has tweaked the company’s strategy, while his keeping the broad outline of his predecessor. But compared with Looney, who was fixated on greening BP at any cost to his shareholders, the new CEO is adopting what he called a “pragmatic” attitude. “We will be relentlessly value and returns focused with our investments,” he said. The cost reduction targets already announced, plus some indications that BP is stepping away from some costly renewable adventures with paltry returns, are welcome signs. More is needed.
For now, investors don’t have much clarity of what exactly the Auchincloss wants to do beyond the next few months. Will he continue letting oil production decline, or is he prepared to reverse course and greenlight multibillion-dollar investments in oil projects that would be controversial not only outside BP, but perhaps even among its board of directors?
The answers will determine the future of what had been a mighty British oil major that’s now about the size of an American shale company. Activists are hovering, and with the stock in the doldrums, it’s vulnerable to a takeover. BP still has great businesses its rivals find attractive, namely its US Gulf of Mexico operation and its global trading unit. As I said, the company is on borrowed time, in more ways than one.
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