The last 12 months haven’t been good for BP (LSE:BP) shareholders, with the stock falling well behind its FTSE 100 rival Shell (LSE:SHEL). But there are signs things could be starting to look up.
An announcement of a $3.5bn (£2.8bn) share buyback programme for the first half of 2024 has caused the stock to rise. But is this a sign of good things to come, or a short-term relief?
Same, but different
Before the latest news, the stock market had been treating the two oil companies very differently over the last 12 months. Shares in BP were down 2.5%, compared to a 4.5% gain for Shell.
On the face of it, that seems strange for two reasonably similar companies. But a look below the surface reveals some important differences that explain the situation.
BP had been investing heavily in renewable energy projects, including offshore wind developments. By contrast, Shell has avoided such initiatives, focusing instead on dividends and share buybacks.
It’s pretty clear which approach the market has favoured over the last year. And with good reason – the company has arguably picked exactly the wrong time to try and invest in the renewables space.
High inflation has caused construction costs to increase and rising interest rates have made funding projects more expensive. This has resulted in significant impairment charges for BP.
The announcement of a share repurchase programme worth 3.4% of the company’s market-cap might mark a shift in approach though. So things could be about to look up.
Timing
Arguably, the issue with BP’s renewables investments isn’t that they were a bad idea. It’s that they were undertaken at a time when these kinds of projects were providing low returns.
That might be changing. With inflation stabilising and interest rates looking set to fall, the energy transition might be an interesting investment opportunity.
Thus there’s a possibility that BP is shifting to a share buyback policy at exactly the wrong time. And with profits falling as oil prices normalise, the move might look risky.
So if I were a BP shareholder, I’d be optimistic. I’d much rather see the company play to its strengths and focus on what it does well, which is hydrocarbons.
It’s not obvious to me that BP has any specialist abilities in renewable energy. That makes putting significant amounts of cash into the sector risky, especially in a competitive environment.
Using cash for share buybacks instead allows the company to increase shareholder value. That’s why I think the move is the right one for the company at this time.
Time to consider buying the stock?
The change in direction has coincided with a change in leadership. In September, Murray Auchincloss took over from Bernard Looney as CEO, in a move that’s now been made permanent.
Increasing share buybacks at a time when profits almost halved from the previous year is a bold move. And it remains to be seen exactly how BP will manage the transition to renewables.
I’m much more interested in the stock now than I was six months ago though. I think the new CEO has a good sense of what the company’s priorities should be going forward.
