BP bets continuity, reassurance on governance, energy-transition commitment will pay in long term

BP PLC has made clear with the confirmation of Murray Auchincloss as chief executive that it remains committed to its transformation to integrated energy from integrated oil company (IOC), putting continuity ahead of near-term concerns about its share pri

By Rohit N. , Director, Corporate Ratings

Investors hoping that a new BP CEO might follow the example of bigger US rivals ExxonMobil Inc. and Chevron Inc. with a more aggressive stance in pursuing high-margin growth through a renewed emphasis on oil and gas will be disappointed with the absence of a positive catalyst to BP’s languishing share price – but hardly surprised.

Chairman Helge Lund had assured investors that BP’s strategy would not change even before launching a search for a new CEO. The board, having indicated that it would only consider candidates committed to the integrated energy company (IEC) vision, then chose acting CEO Auchincloss. Auchincloss faces the same difficult task as his predecessor Bernard Looney of convincing investors that BP is capable of “performing while transforming” its business through investments in activities such as biogas, hydrogen and electric vehicle charging.

There will also be questions over what strategic room for manoeuvre Auchincloss has if he is to adjust this strategy to make the best of volatile energy markets and while adapting to the inevitable uncertainty over future environmental policies and technological change in the sector.

High octane: BP cash generation likely to remain strong within historical context

Environmental concerns re-emerge though energy security remains top issue

In BP’s favour, we expect environmental considerations to play a bigger role again after energy security concerns took centre stage in political and business discussions involving the industry after Russia’s escalation of its war in Ukraine nearly two years ago.

The COP28 agreement to transition away from fossil fuels is one example, although the tangible impact of revived regulatory and investor scrutiny will likely be in the medium and long term rather than in 2024. The energy transition remains hugely complex involving a multitude of stakeholders with diverse interests and the pace of policymaking determined by nearer-term objectives, not least residual concerns about energy security.

Growing pressure on IOCs’ business risk profiles remains manageable because of the rather remote prospects of peak oil and gas demand, given that ensuring that households and industry have easy access to affordable energy is crucial, both economically and politically.

BP itself is nothing if not a good example of an IOC making some progress in its business adaptation towards a lower-carbon future while benefiting from the ample profitability of their legacy businesses due to favourable commodity prices. BP’s financial profile, boosted by elevated commodity prices mainly during 2022, will remain strong for a prolonged period. Cash generation will remain near record highs even if the 2022 peak is unlikely to be repeated, assuming a moderate decline in energy prices rather than a sharp drop as happened with the onset of the pandemic in 2020.

Auchincloss, who was BP’s chief financial officer before his new role, finds himself a company in fine fettle, with plenty of financial headroom even after accounting for generous shareholder remuneration in the form of dividends and continuing share buybacks, with the company committing to deploy 60% of its ‘surplus cash flow’ (broadly equivalent to cash flow from operations less repayments, capex and dividends) towards buybacks. The group has also committed to holding 40% of its 2023 ‘surplus cash’ for a stronger balance sheet, leaving it with the optionality to increase shareholder remuneration to nearly 100% from 2024 onwards, if needed.