BP in a ‘trilemma of energy’ over the green transition

Many City analysts saw Murray Auchincloss, the Canadian executive who was confirmed as BP’s permanent boss by the company in January, as the continuity candidate that would help stabilize the ship following the abrupt departure Bernard Looney.

The company has been plagued by the perception of being in a strategic fog for ten months now, instead of reassuring its investors. Since the beginning of the year, shares of the oil major have lagged behind their peers in the sector of oil and gas, increasing the valuation gap.

The FTSE 100 Energy Group is expected to drop a Looney-set target of reducing its oil and natural gas production by 25% by the end decade, compared to 2019. It pumped around 2.3 million barrels per day last year. After a dramatic rise in commodity prices, the goal was reduced from a 40% cut to a 30% reduction.

Murray Auchincloss has hinted at a possible rethinking of the pace in which he implemented a green change.

BP said that it would not comment on speculation. Auchincloss has suggested that he may be open to rethinking the cuts . In July, when asked: “I am not focused on production volume; I’m focusing on cash and earnings. I continue to say that the market is what counts.”

Analysts will likely ask him how committed BP is to its target when it releases third-quarter results on Tuesday. Irene Himona is an analyst with Bernstein. She said that given the recent weakness of the stock, this would be a good opportunity for BP to clarify its position.

Bluebell Capital is one of those who have called on BP’s board to clarify their position. The activist investor holds a small, but undisclosed interest in BP. It wrote the board this week. It criticised “an ill thought out strategy” aimed at drastically shrinking its core oil business.

Auchincloss said in July at the time the group announced its interim results that he was “very, very happy with the direction the company is taking right now”. He also stated he wanted to run a “simpler and more focused” business. The group has a goal to spend 25 percent of its capital on lower carbon projects in the first half this year.

Josh Stone, UBS’s head of European Energy, stated that the market was now clamoring for a formal update on the strategy.

The BP chief has assumed his position at a moment when investor attitudes toward ESG — Environmental, Social and Governance — have shifted compared to when the oil and gas sector was booming during the early days after the pandemic. Looney set ambitious reduction targets for 2020. renewable energies have also become less profitable due to higher interest rates and inflation in the supply chain.

Auchincloss, who was Finance Chief alongside Looney at the time of the green switch, may have played a role in the reluctance of BP to take a more explicit course. Chris Kuplent is the head of European Energy Research at Bank of America. He said that Auchincloss was caught between shareholders’ demands for him to be radical and his lack of mandate.

He has laid out plans for saving at least $2 billion by the end 2026, and has frozen all external hiring except for frontline positions, well-site leadership and other safety critical roles.

In an effort to reduce costs and simplify operations, the bidding process for new offshore wind projects was also halted. Resources have instead been focused on existing UK and German projects. BP exited the US market last month after selling its ten onshore wind farms.

Himona noted that the focus has shifted from a series of acquisitions to pick projects with the potential to generate higher returns.

Some people have raised eyebrows about the timing of BP’s acquisition spree, and subsequent dispositions, at a time when valuations are being pressured. Kuplent stated. “BP made a huge push for renewables at the height of ESG.”

Investors were more interested in ESG than oil and gas when BP set ambitious reduction targets for oil and Gas.

The company’s efforts to streamline have failed to stop the share price decline. Its shares have dropped 13 percent since the beginning of the year. This is a dramatic underperformance compared with Shell, its London listed peer as well as American competitors. Market sentiment has been sullied by disappointing cashflows in its oil trading and refinery businesses, as well as a higher gearing level compared to peers.

BP is sticking to its target of delivering adjusted earnings between $46 billion and $49.3 billion next year. This represents an increase from the $43.7 billion earned last year. Analysts, however, are less optimistic, as the consensus forecast is now $38,2 billion. The volatile oil price has also added to the uncertainty.

Shell has also been eager to emphasize the importance of returning capital to investors in order to close the valuation gap between American counterparts. In February, the company increased its payout ratio from 60% to 80% of surplus cashflow. This was “a step too high and quite aggressive”, according to Kuplent.

Analysts disagree on whether the group will be able to deliver its sweetened shares buybacks of $14 billion this year and next. UBS cut its forecast of share buybacks for next year to $4 billion, based on a lower average oil price, $75 per barrel, as opposed to $80 a barrel this year. Kate Thomson, BP’s chief financial officer, said that the next update on buybacks would be in February. The company will “take into account facts and circumstances” at that time.

Analysts have suggested that a stronger balance sheet could be achieved by more aggressive dispositions. This would earn a better rating from investors.

BP, like other oil majors is facing what Kuplent calls an “energy trilemma”.

“On one hand, you want to invest in the future and your reserve life. You’re also trying to provide shareholders with a sufficient cash return. And at the other end of the trilemma you are limited by your ability to balance the books. BP falls short of its peers in many of these areas.