Why BP Learned to Love Oil Again

Key Concepts:

• BP's financial struggles and underperformance compared to its rivals (Exxon, Chevron, Shell, Total).
• Activist investor Elliot Management's significant stake in BP and potential influence.
• BP's historical context, from its origins to its privatization and current market share.
• The Deepwater Horizon oil spill and its catastrophic impact on BP's finances and reputation.
• BP's involvement in Russia and the impact of the Russia-Ukraine war on its operations.
• BP's attempted transition to renewables and subsequent pivot back to oil and gas.
• BP's debt burden and cost-cutting measures.
• The role of geopolitical factors and climate change concerns in BP's future.

1. BP's Financial Underperformance and Investor Pressure

• BP's share price is trading below its level from five years ago, unlike its rivals Exxon, Chevron, Shell, and Total.
• Activist investor Elliot Management has built a significant stake in BP, signaling potential for major strategic changes.
• Elliot Management is known for demanding strong action, including rehauling boards, removing top management, and breaking up companies.
• Bloomberg reported that Elliot Management wants to boost value by pushing BP to consider transformative measures.

2. Historical Context and Market Share

• BP is one of the oldest British companies, with origins in the early 20th century.
• It became British Petroleum in the 1950s and played a key role in London's economic revival through privatization in the 1980s.
• BP's current share of global oil production is relatively small, around 1% to 1.2%.
• In the 2010s, BP's oil production was slightly larger than Shell's (around 2.2-2.3% vs. 1.8-1.9% of global production).
• BP's market value in mid-March was about $92 billion, less than half that of Shell.

3. The Deepwater Horizon Disaster

• The Deepwater Horizon oil spill in 2010 was a major turning point for BP.
• The disaster cost BP over $60 billion and resulted in a four-year ban on US government contracts.
• A US federal judge found that the oil discharge was the result of gross negligence and willful misconduct.
• BP shed more than half its value in 2010 and has never fully recovered.

4. Involvement in Russia and the Impact of the War

• BP had about 40% of its production in Russia.
• After taking over as CEO in 2010, Bob Dudley had struck a deal with Rosneft, Russia's largest oil producer.
• Russia's invasion of Ukraine had a devastating impact on BP, cutting its production volumes in half.
• BP had to abandon its Russian operations.

5. Transition to Renewables and Pivot Back to Oil and Gas

• In 2020, CEO Bernard Looney announced a shift towards bioenergy, EV charging, hydrogen, and renewables.
• BP aimed to increase investment in transition growth businesses to over 40% by the middle of the decade and 50% by 2030.
• BP predicted in 2020 that global oil consumption had peaked, but this proved to be a miscalculation.
• Following the Russia-Ukraine war, BP pivoted back to oil and gas.

6. Debt Burden and Cost-Cutting Measures

• BP has a high level of debt, with a net debt-to-equity ratio of about 40% at the end of last year, exceeding that of Shell, Total, Chevron, and Exxon.
• CEO Murray Auchincloss promised investors a fundamental reset of strategy to grow cash flow and returns.
• BP is cutting around 5% of its workforce and weighing a potential sale of its lubricants business.
• BP announced a plan to divest $20 billion worth of assets.

7. Potential Changes in Leadership

• Elliot Management's demands could put pressure on BP's chairman and CEO.

8. Geopolitical Factors and Climate Change

• The current geopolitical environment and the tensions between Russia and NATO could shift priorities away from climate discussions.
• The question of whether climate will continue to play a significant role in Europe over the next five to ten years is crucial for BP's survival.

Synthesis/Conclusion:

BP faces a complex set of challenges, including financial underperformance, investor pressure, the legacy of the Deepwater Horizon disaster, the impact of the Russia-Ukraine war, and the need to balance its transition to renewables with the continued demand for oil and gas. The involvement of activist investor Elliot Management could lead to significant strategic changes. The company's future depends on its ability to address its debt burden, adapt to the evolving geopolitical landscape, and navigate the ongoing debate about climate change and energy security.