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There are two ways to cut loose from the shackles of a failed strategy: whittle away, or wield the axe. BP’s attempts at pursuing the former have failed to ignite investors’ enthusiasm. US activist investor Elliott Management, which has amassed a near-5 per cent stake in the £75bn UK oil and gas company, may well prod it to do the latter.
There are plenty of areas where the use of a sharp instrument could unlock value. For one thing, while BP’s upstream operating costs are industry leading, its corporate costs are not. The group has announced it would deliver $2bn of cuts between 2023 and the end of 2026. Benchmarking by Goldman Sachs suggests the company could cut perhaps $7bn — or more than 15 per cent of 2024 ebitda — to bring its selling, general and administrative expenses into line with the industry average.
A total break-up of BP is unlikely to be on anyone’s list of priorities. There are benefits to operating lots of big, bulky industrial assets. And having upstream oil and gas production under the same roof as downstream refining is the recipe for a profitable trading desk.
But chief executive Murray Auchincloss could do some judicious chopping without significant dis-synergies. Analysts believe BP’s low carbon assets have dragged on returns. The group has invested $14bn in its “transition growth engines” — which include renewables, hydrogen, electric vehicle charging, bioenergy along with its convenience stores — over the past four years. BP has moved to reduce its exposure, putting its offshore wind assets into a jointly-owned business with Japan’s biggest power generation company Jera. There may well be room to do more.
Indeed, BP could fetch $26bn by disposing of some of its low carbon, pipeline and marketing businesses, Goldman Sachs believes. On top of that, it has a valuable lubricants business — Castrol — which might be worth a further $10bn. Together, that’s equivalent to more than a third of BP’s current market capitalisation.
Of course, there is not much point refocusing a business on its core activities if those are themselves lacklustre. And it is true that BP’s upstream portfolio, while in many respects high-quality, is hardly a growth business. Its oil and gas production is expected to shrink in 2025 as part of announced disposals.
European investors are no strangers to post-growth oil majors. The equity story for the continent’s oil companies has long relied on a combination of dividends and buybacks. At almost any valuation, asset sales would unlock value compared to BP’s lowly enterprise value to ebitda multiple, which S&P Capital IQ puts at 3.8 times. And once deleveraged and refocused, BP would at least return to the pack.
camilla.palladino@ft.com
