There’s never a dull moment over at BP (LSE: BP.) these days. With the valuation gap between itself and the other oil supermajors having grown into a chasm, and an activist investor, Elliott Management, pushing for a radical overhaul, the business desperately needed to do something to arrest the share price blues. Enter stage right a strategy reset. But the million dollar question: will it work?
Black gold
The centrepiece of its strategy is an 18% boost to investment in oil and gas production. $30bn over the next three years. 70% will be earmarked to oil, the rest to gas.
During its full-year results presentation in early February, it laid out 10 major projects that had been given the green light. One of the most interesting is the development of the Kirkuk oil and gas fields in Iraq.
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The fields were first discovered over 100 years ago by a consortium that included BP. Given the well-documented history of the country, a tie-up with the government must be seen as a major coup. After all, the whole area sits in one of the most prolific hydrocarbon regions on the planet.
Over the lifetime of the project, the investment could be as large as $25bn. But this investment could be worth its weight in gold. It estimates that the fields and surrounding areas house over 20bn barrels of potential resource.
Execution risk
Key to a successful strategy is improving fundamentals. By 2027, BP is targeting growing adjusted free cash flow at a compound annual growth rate of 20%, from around $8bn price adjusted in 2024. Return on average capital employed (ROACE) will improve by four percentage points to 16%.
But the devil is in the detail. Words are cheap, it’s execution that matters.
Ultimately, the success or failure of a strategy comes down to the employees who will need to implement it. That’s why in any major transformation I like to primarily hone in on the ‘people dimension’.
Five years ago, BP marketed itself as ‘beyond petroleum’. A lot of the hires since then would have come in potentially with a certain set of believes and mindsets about what that entailed. Now they are being asked to re-assess such core beliefs.
The point of giving just this one small example is to highlight the significant execution risks the company faces over the next few years.
Energy is life
Ultimately, BP got the pace of the energy transition wrong. The main reason why I first opened up a position in the company and Shell back in 2020 was a belief that the demise of oil and gas was exaggerated.
I certainly didn’t predict Covid, a supply chain reset, and a war in Europe, all of which contributed to soaring energy prices. But today, the investment case for BP is just as compelling as in 2020.
Demand for energy is growing. Increasing urbanisation, a growing Asian middle class, onshoring of manufacturing in the US, AI and data centres. Even green technologies need it. Everywhere you look, the world is hungry for energy.
Who knows how long BP will languish behind its peers. My guess is that over time the valuation gap will close. That’s why I continue to reinvest my dividends and buy more shares when finances allow.
