At the headquarters of Elliott Management in New York, the hedge fund’s energy team now has T-shirts with “Gulf of America” printed on them, including one with a picture of Donald Trump as a pirate, in honour of the US president’s preferred name for the Gulf of Mexico.
It is a far cry from the mood even last year. Then, the activist investor questioned whether calling for an oil major to scale back its green spending would risk a backlash from environmentalists and even the media, according to people who spoke with the hedge fund at the time.
Times have changed. As shares in UK oil group BP sank to a two-year low last November the activist investor was already busy building what has grown into a near £3.8bn stake in the troubled company.
The move has started to pay off. Shares in BP have risen more than 26 per cent from that low, with Trump’s rallying cry of “drill baby, drill” lifting the mood around oil and gas companies and putting greater focus on their core business of selling fossil fuels.
But sentiment around BP had also soured by the time the hedge fund made its move, said one person familiar with Elliott’s thinking. The activist had concluded that investors and analysts were now of the view that BP was destroying value. “The level of consensus is shocking,” the person said.
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The oil company’s share price spent most of last year in free fall as it persistently fell short of the market’s expectations, both financially and operationally, and made nearly $7bn of writedowns across its business, notably in refining.
Despite its troubles, BP frustrated investors by insisting that it would stick to a strategy — set out by former chief executive Bernard Looney in 2020 — that called for the company to “reinvent” itself by spending several billion dollars a year on green energy and cutting oil and gas production.
The target to cut oil production by 40 per cent by 2030 was scaled back to 25 per cent in February 2023 by Looney, who was then abruptly sacked for a scandal over past relationships with colleagues. But BP remains the only oil major with a pledge to actually cut its output. Meanwhile, its “transition growth engines” contributed just $1.2bn out of its $38bn of adjusted earnings before interest, tax, depreciation and amortisation last year.
Murray Auchincloss, who became chief executive just over a year ago, has already put BP’s onshore US wind business up for sale and spun off its offshore wind projects into a joint venture. The company is looking for a similar structure for its Lightsource solar business. He told analysts in October that while BP wants to have “a continued commitment to transition”, it would look for a “capital-light” model when possible.
Still, BP’s troubles have attracted attention — and not just from Elliott. Several other activists told the Financial Times they had also taken a look at the oil group, despite the daunting scale of building a credible position in a £75bn company. “It is a treasure trove of assets stuck in a management swamp,” said one US activist. Another warned that there was “no easy fix” to the challenges facing the company.
While news of Elliott’s position broke last week, the hedge fund has been studying BP for more than a year and started building its near 5 per cent stake “well before” Trump’s election victory in November, according to another person familiar with the matter.
The Elliott campaign is being run by New York-based John Pike — who has led a series of past campaigns against energy companies Hess, Marathon, Suncor and Phillips 66 — and by Gaurav Toshniwal, a portfolio manager in London. This week the hedge fund also stepped up its campaign at Phillips 66, revealing it had a $2.5bn stake and calling for the refiner to sell off pipeline and chemicals assets.
The play at BP may be similar. Elliott’s view is that BP must make significant divestments including in its green energy businesses, according to the person familiar with the hedge fund’s thinking. A break-up or a sale were not currently on the activist’s agenda, they said, adding that Elliott would be willing to hold the position in BP for several years if required.
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Comparing BP to Anglo American, the UK-listed mining company where Elliott also has a stake, the person said that what was needed was “an aggressive chair leading an engaged board, with a chief executive that bought into the strategy”.
The formula for BP, the person added, was straightforward: “It is strong capital allocation, right sizing their costs, a divestiture plan and resetting the strategy. It is making sure that shareholders who have stuck with the company are rewarded. It is a fundamental pivot.”
The activist’s arrival sets up a crucial test for Auchincloss at BP’s capital markets day on February 26. Amid frustration at the group’s lack of direction, Auchincloss has promised to “fundamentally reset” his predecessor’s strategy.
Rebuilding BP would take time, warned analysts, bankers and investors. One senior energy investment banker said the heavily indebted company was running out of “levers to pull”.
The company has upstream projects under development, including some promising fields in the Gulf of Mexico, and has said it will return to Iraq’s vast Kirkuk field. But Kaskida in the Gulf of Mexico is not due to come online until 2029 and it will take two to three years to increase production at Kirkuk. Analysts expect all of BP’s new projects simply to offset declines elsewhere, with Biraj Borkhataria at RBC Capital Markets pencilling in 2.3mn to 2.4mn barrels a day of production in 2030, the same level that it has been since 2020.
Investors are also wary after a year of disappointing financial results.
“The shares are cheap but not that cheap. The underperformance in its share price reflects its actual underperformance,” noted Stuart Joyner, an analyst at Redburn Atlantic. Thanks to its high debt levels, BP was particularly exposed among its peers if oil prices start falling, he said. “If they drop to $60 or $55 a barrel, BP will struggle.”
Many of the company’s critics have hit out at Auchincloss, but others argue that BP’s woes stem from a relatively inexperienced board and its chair, Helge Lund, who splits his time between the oil major and the same position at Novo Nordisk.
One former senior BP executive described the chair as a “disaster”, adding: “He had two jobs, manage the chief executive transition — an utter failure — and manage the energy transition, another failure.” Amanda Blanc, BP’s senior independent director, is seen as one potential successor to Lund by headhunters and industry executives. However, she is considered unlikely to leave her day job as Aviva’s chief executive in the near term following the insurance group’s acquisition of Direct Line.
Despite the growing pressure, Auchincloss said this week that he felt “well-supported” internally and by the board. “It’s always a difficult time when there’s uncertainty,” he told the Financial Times. “I’m sure that as strategic clarity is provided that will make people more comfortable and we’ll move forward.”
Additional reporting by Jamie Smyth and Sujeet Indap in New York and Ivan Levingston and Arash Massoudi in London
