Elliott Has a Point on BP’s Ballooning costs

Print 🖨

(Reuters Breakingviews) – Elliott Investment Management has a point about BP. Paul Singer’s activist investor group wants the $76 billion oil major, which reported on Tuesday, to cut costs more aggressively. Having allowed key operating expenses to balloon $10 billion since 2019 – or 30% – BP has minimal grounds to push back.

Elliott, now BP’s third largest shareholder with a stake around 5%, dislikes CEO Murray Auchincloss’s recent strategy reset. His pivot away from a failed transition into low carbon energy was less ambitious than it had recommended. Investors seem to agree: BP’s market value has shrunk 19% since the update, while European rival Shell’s fell only 8%, and U.S. competitor Exxon Mobil lost 1%. That’s a microcosm of BP’s general underperformance in recent years.

The cost inflation is hiding in plain sight. Between 2019 and 2024, BP’s combined production, manufacturing and distribution expenses soared from $33 billion to $43 billion. That wouldn’t matter if growth and profitability rose too. But over the same period operating expenses as a percentage of EBITDA rose from around 70% to nearly 100% in 2023, Barclays analysis indicates. They reached 113% in 2024, according to Breakingviews calculations.

Differing cost metrics complicate direct comparisons with BP’s fellow UK energy giant, Shell. But BP’s $196 billion rival saw its own expenses fall from $37 billion to $36 billion between 2019 and 2024. Its opex also fell as a percentage of EBITDA, and BP now employees 100,500 people compared with Shell’s 96,000.

Elliott thus has some ammo in its ask for BP to bump up its free cash flow, which Auchincloss’s target envisages growing by around 20% each year through to 2027, opens new tab and hitting $14 billion by the end of that year. The activist reckons that number should be more like $20 billion, with $5 billion of the $6 billion gap filled by fresh cost cuts.

One way to do this would be to hack away more aggressively at green hires made by ex-CEO Bernard Looney, which have left BP staffed up in less profitable areas like hydrogen. Some $2 billion to $3 billion could be trimmed from distribution and administration expenses alone, a source told Breakingviews. But cost overruns at BP’s Senegal liquefied natural gas (LNG) project imply a wider expenses issue.

ROO.AI Oil and Gas Field Service Software

On Tuesday, BP did at least announce the exit of strategy and sustainability chief Giulia Chierchia, who won’t be replaced. But Auchincloss is sticking to an expense reduction target of $4 billion to $5 billion from 2023 levels. And management continues to blame “variable costs”, driven by transport and shipping. If the CEO doesn’t find a way to hack more aggressively, other investors may lobby BP’s yet-to-be-appointed new chair to find one who can.

BP on April 29 reported underlying replacement cost profit – a proxy for net profit – of $1.38 billion for the first quarter. That was below the $1.53 billion expected by analysts in a company-provided poll.

BP said it would spend $14.5 billion this year, around $500 million less than its previous guidance, and reiterated its $13 billion to $15 billion target for next year and 2027. BP’s strategy and sustainability chief Giulia Chierchia will step down on June 1, the company also said on April 29.

BP shares fell 3.2% as of 0703 GMT on April 29.

Activist investor Elliott Investment Management has urged BP to boost its adjusted free cash flow to $20 billion by 2027 from an oil-price adjusted $8 billion in 2024, through significant spending cuts and cost reductions, Reuters reported on April 25 citing a source familiar with the matter.