OIL giant BP plc has been searching for a new CEO to replace Bernard Looney for almost three months. The wait, even if unnerving, wouldn’t be a problem if it was worth it — alas, it won’t be, as the search process is deeply flawed.
Instead of seeking an imaginative boss to reshape the company, BP is looking for a safe pair of hands to administer its current strategy. If the oil major had printed a job advertisement, it would read something like: “Seeking new CEO. Reporting to the board, the successful candidate will maintain the course followed by the previous CEO.”
The firm is looking to appoint someone more akin to a chief operating officer (COO) rather than a CEO. Even so, a COO masquerading as a CEO wouldn’t be a problem if the current strategy was working, and if investors liked it. But it isn’t, and they don’t. Of the five major international oil companies, BP is the only one that’s down (in US dollar terms) from
January 2020, before the onset of the Covid-19 pandemic. A new name at the head of the organisation is unlikely to turn around the underperformance. But the combination of new chief and a rebooted strategy might.
For the last few years, I had been perennially sceptical of the efforts of BP and its rival Shell plc. Both pursued aggressive “lets-get-out-of-fossil-fuels-quickly” paths, only to change course in the past year when it became clear that demand for hydrocarbons would remain strong for decades to come, and the profitability of many green energy projects, particularly in the wind sector, didn’t meet expectations. Shell has performed a complete U-turn; BP has curbed its green ambitions.
To say investors didn’t like the original shift would be an understatement. They voted with their feet, selling stock. Even after BP slowed down the strategy, shareholders remain, at best, lukewarm. Talk to BP insiders, and they protest vigorously, saying the feedback suggests stakeholders are on board with the change in direction. Maybe. But on a price-to-earnings basis, BP trades at a 4.1 times ratio, compared to nearly 7.7 times for Shell and 8.7 times for TotalEnergies SE. The American oil giants Exxon Mobil Corp and Chevron Corp trade above 10 times.
BP’s shareholders may understand the new strategy, but clearly, they aren’t buying it.
Why investors are so down on the company? Look at the numbers underpinning its new direction. Even after tweaking the plan, BP is spending generously on lower-return projects outside its core oil and gas (O&G) businesses. As a result, it needs a high — and rising — oil price to sustain the payouts shareholders have become used to.
BP has guided investors to expect it to spend US$14 billion to US$18 billion (RM84.06 billion) in 2025, of which US$6 billion to US$8 billion will be in its so-called transition businesses. By 2030, BP has promised to accelerate its green shift, lifting spending in non-O&G operations to as much as US$9 billion.
BP interim CEO Murray Auchincloss delivered an update on his spending plans last month, setting out a list of priorities.
First, the dividend; second, maintaining an investment grade credit rating by reducing debt; third, investing in its so-called transition businesses; O&G came fourth; and fifth was share buybacks. Note how green energy came ahead of fossil fuels.
The net result is that BP would be only able to repurchase shares at an annual pace of US$4 billion — matching recent outlays — if it cuts total spending to the lower end of its projected 2025 range and oil prices stay above US$60 a barrel. But here’s the big catch: The US$60-a-barrel figure refers to a 2021 value.
With inflation surging since then, it equals to more than US$70 in today’s money. By 2025, even after the slowdown in inflation, it would be US$75 a barrel — not a lot lower than current oil prices.
In short, there’s not much room for missteps, particularly if Saudi Arabia and OPEC+ change strategy and don’t support prices as high as in recent years.
Under a new CEO with a free hand to design, or at the very least, adjust the strategy, BP could do much better. As Shell’s new CEO Wael Sawan has shown, the only metric to decide investment should be the risk-adjusted return on capital employed. Sawan has reduced capital expenditures across the company, and sold underperforming new energy businesses.
BP has extra work to do. Its reliance on the division that trades its O&G and electricity to make windfall profits in recent years now has a downside: Earnings volatility. Investors last quarter were surprised by an unexpected drop in trading profits. JPMorgan & Co recently argued that variability should encourage shareholders to demand a yield premium for BP — in effect, a lower valuation. The company has failed to explain to investors the mechanics of its trading unit, and therefore why they should assign it a higher value.
Handicapped by the disastrous Gulf of Mexico oil spill in 2010 and a traumatic exit from Russia last year, BP is a shadow of its former self. Its market capitalisation stands at little more than US$100 billion, down from a 2006 peak of US$250 billion.
It’s time for a truly new, bold and ambitious CEO — not a placeholder candidate implementing the same old strategy. — Bloomberg
- This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
This article first appeared in The Malaysian Reserve weekly print edition