The market’s guessing game at BP is waiting for Murray Auchincloss, the chief executive who has been in post permanently only since January, to blink. That is to say, waiting for him to tone down climate targets and decide to pump more oil and gas than planned.
Tuesday was not the day. BP’s first-quarter numbers were slightly weaker than the market had expected – profits of $2.7bn versus City forecasts of $2.9bn – but there wasn’t a twitch on the strategic tiller. Auchincloss trotted out his refrain about going from “IOC to IEC” – from international oil company to integrated energy company. The only fresh news was the promise of $2bn of cost savings over the next couple of years, but that’s the sort of thing energy firms announce routinely.
Naturally, none of this did anything for a share price that is rated at a discount to London’s other oil major, Shell, a company itself grumbling about its own discount to American rivals Chevron and Exxon. BP, in other words, is rated towards the bottom end of the Big Oil pack. It is why its ambition to throw more capital, relatively speaking, at non-fossil fuel projects, such as biofuels, renewables and electric charging points, has come under such scrutiny.
BP’s transition strategy doesn’t meet everybody’s definition of swift – it imagines oil and gas production at 2m barrels a day by 2030, a 25% reduction versus 2019 levels – but the point is that it is more ambitious than most major rivals. That is why one vocal lobby would like to see less ambition and more oil and gas for longer.
Auchincloss, it should be noted, has given himself room to wriggle. He has billed himself as a pragmatist and his latest talk about “high grading” development projects to prefer those with higher returns could, in theory, morph into a slightly heavier tilt towards oil and gas without being deemed an outright U-turn. The 2030 production projection, remember, is an “aim” rather than a “target”.
Yet one hopes Auchincloss doesn’t blink and sticks to something like the current script. BP’s claim is that it can generate 15% returns from biofuels and electric charging, which is roughly what oil and gas produces over the cycle. Renewables – meaning wind and solar primarily – is more of a struggle these days, but even there BP still reckons double-digit returns are achievable if the assets are plugged into other parts of its business, including, critically, the energy trading division.
The hardest part is injecting credibility into such figures. The “transition growth engines”, as BP calls them, won’t be big enough to move the overall earnings needle until the end of the decade, which puts the pitch to investors in the complicated “trust us” category.
For the time being, though, there’s no substantive reason to change course, whatever the share price says. First, aside from a misadventure with wind projects in the US, BP hasn’t obviously messed up yet. Second, $14bn of share buy-backs over two years, equivalent to 14% of the current market capitalisation, provides some level of floor. Third, the currently unfashionable notion of investing a few quid outside oil and gas in the interests of greater balance in earnings may look a smarter bet come 2030. Strategic fiddles, not revolution, are needed here.
