BREAKINGVIEWS-BP reincarnates as more vulnerable Shell

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Yawen Chen

LONDON, Feb 26 (Reuters Breakingviews) - BP BP.L is doing a Shell-style SHEL.L reset nearly two years after its arch-rival’s dirty pivot. Amid pressure from activist investor Elliott Investment Management, BP boss Murray Auchincloss took the leap in following his Shell counterpart Wael Sawan to drop capacity targets for renewables and to lower green investments. The problem is that he could still be forced to do more.

Auchincloss has heeded the call for a better way to spend BP’s money. In the last five years BP had dedicated a fifth of its capital to so-called “transition growth engines”, Citi reckons, but investments in those like offshore wind have disappointed. BP’s shares have gained merely 2% over that period while those of Shell rose 48% and Exxon Mobil XOM.N stock surged 102%. A sprawling business covering everything from oil exploration to electric vehicle charging and offshore wind doesn’t help its valuation.

With activist Elliott hovering in the background, Auchincloss on Wednesday announced a “reset” to limit annual spending on the renamed “transition” business to just $1.5 billion to $2 billion annually. On the lower end of BP’s new budget of $13 billion to $15 billion a year, the green investment share is now just a bit over 10%. BP will now spend $10 billion annually on more profitable oil and gas.

But a 2% price drop in BP shares on Wednesday suggests investors had expected more. They may wonder why BP is still pencilling about $800 million each year on hydrogen and carbon capture, for example, which yield single digit returns versus the 15% that dirtier oil and gas business may generate.

Another way to keep shareholders happy is to throw money at them. But Auchincloss on Wednesday cut share buybacks in the first quarter to between $750 million and $1 billion. The problem is that BP needs to shrink a debt pile totalling $23 billion even excluding other liabilities like leases, giving it the highest gearing among its main European and U.S. peers.

BP has a plan for that too. It hopes to reduce its net debt to $14 billion to $18 billion by end 2027, helped by sales worth up to $20 billion, including potentially its high value lubricants business, Castrol. Yet so far Auchincloss has only launched a review of the business, with no clear commitment to a sale or timeline. That’s unlikely to please Elliott, which would like BP to exit its offshore wind business, and to put up its retail sites and EV charging networks for sale, according to a person familiar with the matter. Those marketing businesses could be worth $24 billion according to Breakingviews calculations.

All that means BP’s troubles may not be over. If its shares continue to struggle, Elliott may find support from other shareholders to push for more radical action. BP’s dirty pivot doesn’t make it less vulnerable.

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CONTEXT NEWS

BP said on February 26 it would increase annual oil and gas investment to $10 billion, while reducing investment in transition businesses to $1.5 billion to $2 billion per year.

The company also said it was reviewing its lubricants business, Castrol, and targeting $20 billion in divestments by 2027.

BP says it expects to spend $750 million to $1 billion on share buybacks for the first quarter of 2025.

BP shares fell 2% to 428 pence as of 1027 GMT on February 26.