An existential risk: can BP avoid becoming a prime takeover target? | BP

When BP’s board faces shareholders at the oil company’s investor day later this month, there will be many questions to answer, and for many, the biggest one will be: how did things go so wrong?

The FTSE 100 company was once valued at more than £140bn, but today its shares trade at a market valuation of less than half that sum. BP has lost almost a quarter of its value in the past two years, while its rivals in Europe and the US have managed to grow and in some cases report record annual profits.

In recent weeks the company has set out plans to cut thousands of jobs from its global workforce, amounting to 5% of its staff, in an effort to save billions in costs to appease its worried shareholders.

BP has fallen out of favour with many investors since embarking on a plan to slash its oil and gas production in favour of spending billions on renewable energy projects. Although it has since backtracked from its full green ambitions, for some the road ahead appears uncertain, though reports emerged at the weekend that the activist investor firm Elliott Investment Management has built a “significant” stake in BP and sees it as undervalued.

This fall from grace could amount to an existential risk for the 120-year-old company. Industry commentators have pointed out that BP is arguably now worth less than the sum of its parts, meaning the company could be a prime takeover target for a rival with deep enough pockets.

Speculation over the future of the company is expected to grow. On Tuesday, BP will unveil its annual financial results after warning that in the final quarter of 2024 its oil and gas production was lower, its oil trading performance would be “weak” and the profit margins from its refining business would be “weaker”.

At the end of this month it will hold its capital markets day in London. It is here that Murray Auchincloss, BP’s chief executive, is expected to set out a new strategy to tackle the company’s falling value, hefty debts and the market’s scepticism of its green energy aspirations.

“We believe BP has a narrow window to come up with a positive narrative,” said Kim Fustier, HSBC’s head of European oil and gas research, adding that a “holistic shift” in strategy was needed to win back investor confidence.

“A shift has already been under way at BP for some time,” said Fustier, as shown by its increased oil and gas developments and a more cautious approach to low-carbon energy investments.

“The key to market perception will be how BP frames the shift. Rather than clinging to an ‘unchanged direction of travel’, it should highlight a more profound change in capital allocation and strategic decision-making,” she added.

Equity analysts believe that in the near term, BP will confirm plans to discard an “aim” to reduce oil and gas production by the end of the decade. The company is also expected to scale back spending on its five “transition growth engines”, which include electric vehicle charges and bioenergy, from between $6bn (£4.8bn) and $8bn in 2025, then rising to between $7bn and $9bn by 2030. This could fall to about $5bn, according to Fustier.

It would also need to divest some assets, said Giacomo Romeo, an analyst at the brokers Jefferies. BP was expected to sell $5bn worth of assets by the end of the year, but it could raise its ambitions to $8bn by next year, he said. These assets could include its US onshore windfarms, retail fuel stations in the Netherlands, or its minority stake in the UK solar company Lightsource BP, Romeo added.

Any plans to relaunch the company’s oil and gas production could be too little, too late if its new fossil fuel volumes come onstream only in the 2030s, when many expect oil consumption to have peaked.

Fustier said: “This might be a concern for climate-conscious investors worried about the impact of the energy transition on oil and gas demand. In summary, rebooting BP’s upstream business is a decade-long endeavour, with little that can be done to accelerate the process.”

These steps may not be enough to win over investors – but perhaps the best Auchincloss can hope for is to win over a potential suitor for a sale.