- Reports suggest Elliott has taken unquantified stake in BP
- Oil major’s shares look cheap relative to those of global peers after marked underperformance since pivot to renewables announced in summer 2020
- BP’s fourth-quarter results due on Tuesday
- Planned Capital Markets Day later this month takes on even greater importance
- Proponents of activism will welcome Elliott’s move; opponents will give four reasons why they do not
“BP boss Murray Auchincloss was already under pressure to deliver something big at the company’s Capital Markets Day on 26 February, but the arrival of activist investor Elliott on the oil major’s share register means the strategy presentation really had better be good,” says AJ Bell investment director Russ Mould.
“BP’s shares have markedly lagged those of its American and European peers for some time and Mr Auchincloss has been on the board as chief financial officer or chief executive since July 2020. He now needs to present a clear strategy, or Elliott may start to agitate for major change at BP, in one way, shape or form.
“Like many so-called ‘activist’ investors, Elliott does not immediately make a hostile approach to the board of a company where it feels there is value ready to be unlocked. It will seek a more ‘suggestivist’ approach as it puts its ideas across. But if those ideas are rejected out of hand, then those suggestions could be made in a more strident, public manner and even lead to campaigns for board representation so that Elliott can help to oversee implementation of its ideas.
“An activist or suggestivist approach can often lead to calls for change in one (or more) of four main areas:
Strategic options: spin or sell
- Asset disposals or spin-offs to recognise value
- Break-up
- Put the company in play for a bid
Financial options: more effective capital allocation
- Share buybacks
- Special dividends
- Dividend initiation or increases
Operational angles: improve performance
- Change the management
- Sale and leaseback of assets
- Close or restructure poorly performing units
Governance: improve reputation and lower risk
- Rein in excessive executive remuneration
- Ensure board has right balance (executive and non-executive)
- Better align management and shareholder interests
“In BP’s case, it is hard to see how Elliott can campaign for higher dividends or share buybacks. In 2024, analysts forecast that BP paid out $5 billion in dividends and ran share buybacks worth $7.3 billion, for a total cash return for its investors that equated to nearly 15% of its current stock market capitalisation.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“Nor is the balance sheet unduly stretched, now that net debt is $22.8 billion, excluding pensions and leases, way down from the early 2020 peak of $50.9 billion, thanks to asset disposals.
“Capital expenditure is due to be held at around $16 billion per year. This is some way higher than the low of $11 billion in 2021, but it is much less than the $24.5 billion peak of 2013.
Source: Company accounts, Marketscreener, analysts’ consensus estimates. *Net debt excludes pensions and leases. **2024E net debt is end-Q3 figure
“It is therefore difficult to suggest that BP is being unduly profligate. However, the issue may not be the quantity of money that BP is spending, but the manner in which it is doing so.
“It may be that Elliott wants BP to clarify its strategy on oil and gas production, renewable energy and the future direction of the group, especially as the shares show marked underperformance relative to global peers since Bernard Looney announced a major pivot away from hydrocarbons in August 2020, just after Mr Auchincloss had taken on the job of chief financial officer.
Source: LSEG Refinitiv data. Includes dividend reinvestment. Local currency.
“Before his sudden departure in 2023, Mr Looney had already refined his plan to cut oil and gas production by 40% by 2030 and trimmed the target to a 25% reduction, even if the long-term target of reaching net zero was left unchanged.
“Investors have continued to question whether the pace of movement is too fast, given the perception that renewables projects offer lower returns on investment and require different skillsets, since the customers, end markets and supply chains are different from the oil and gas industry. US rivals have tended to focus on hydrocarbons, either through exploration work or acquisition, as evidenced by ExxonMobil’s swoop for shale specialist Pioneer Natural Resources and Chevron’s bid to buy Hess.
“BP’s underperformance of its global peers mean that its shares look much cheaper than many of the other global oil majors, to suggest Elliott feels there is value to be had if financial and operational performance can be improved. BP’s shares look relatively lowly rated on an earnings basis, even if it can be argued profits are currently sub-optimal.
“They also rank toward the bottom in terms of price to book, or net asset, value. This suggests investors are not convinced that BP is getting the best possible return on those assets and that there is improvement to be had.
“Oil prices are broadly flat on a year ago and natural gas, as benchmarked by Henry Hub, is up by more than 50%. Even so, analysts still expect BP’s fourth quarter results, due on Tuesday, to show that underlying replacement cost profit after tax will come in at its lowest level since Q4 2020, at $1.3 billion, down from $2.3 billion in the third quarter and $3.0 billion in the same three-month period a year ago.
Source: Company accounts, Marketscreener, BP investor relations website, analysts’ consensus forecasts
“For the full year, this implies 2024 underlying replacement cost profit after tax of $9 billion, down from $13.8 billion in 2023.
Source: Company accounts, Marketscreener, BP investor relations website, analysts’ consensus forecasts
“The pressure is on BP and its management, not least because of its relatively turgid share price performance, but not everyone will welcome Elliott onto the share register. Not all activist campaigns are successful – Elliott got little change out of an engagement with Scottish Mortgage Investment Trust, although the share price did go up a lot – and some argue that activists (or suggestivists) can do as much harm as good for four reasons:
- Activism can encourage a short-term approach which is not always to the benefit of the company.
- It can mean management kow-tows to a shareholder who, while important, will exert greater influence than those with larger stakes simply because they are making more noise.
- Activists can distract bosses from their day job, namely running the company to get the best risk-adjusted returns from the assets at their disposal.
- The activists are not always right. Firms can be tempted to focus on short-term financial engineering and managing the share price, through buybacks and the like, to the detriment of investment in the core business proposition, which actually weakens the company over time.”
