BP disappoints as interim boss rules out M&A

When does an industry-leading commitment to cut production by the end of the decade become a drag as competitors ramp up M&A and production? Right about now, for BP (BP.). 

The energy giant reported “disappointing” third-quarter results, in the words of one analyst, with profits well down on a year ago and buybacks flat on previous quarters. Management was keen to highlight 3 per cent higher production on last year, at 2.3mn barrels of oil equivalent per day (boepd). 

This set of results was the first since Bernard Looney resigned last month after misleading the board over his relationships with colleagues. In recent weeks the industry’s focus has shifted to large-scale consolidation after the US supermajors used their share price strength to add huge new reserves in all-share buyouts. 

BP’s underlying replacement cost (RC) profits, the measure analysts track, were $3.3bn. This was 18 per cent behind the consensus forecast and 60 per cent down year-on-year. This figure was ahead of Q2, however, when oil and gas prices knocked earnings. 

Surplus cash flow, 60 per cent of which goes to shareholder returns, was $3.1bn compared to RBC Capital Markets’ forecast of $4.9bn. The dividend was held at 7.27¢ a share. Its shares were down 4 per cent in response to the Q3 numbers, reversing some of October's gains. 

There were higher expectations than Q2 because of the stronger oil price in September, when Brent crude made it over $90 a barrel for the first time since mid-2022. The US supermajors Chevron (US:CVX) and ExxonMobil (US:XOM) showed just how highly-rated and bullish companies can use that firepower. 

The two $50bn-plus all-share deals will see Chevron grow its offshore resources significantly, especially in Guyana, while Exxon has taken on huge new acreage in the Permian in the US. 

“M&A is really not on our minds to be honest,” said BP interim chief executive Murray Auchincloss on Tuesday morning. The new boss said there had been room for smaller acquisitions within the capital spending range of $14bn-$18bn a year out to 2025, but also ruled out buying new oil and gas assets. “We’re focused really on transition [assets]. At $90 a barrel, I’m not sure it makes sense for us to pursue very many oil and gas transactions given the scale of our resource base.” 

Management was keen to highlight a strong quarter operationally, although this did not flow through to the bottom line. “Despite some solid operational indicators, earnings missed across all divisions,” said RBC analyst Biraj Borkhataria. 

The quarter also saw a $540mn writedown on its US offshore wind assets due to the New York state regulator’s rejection of a power purchase agreement renegotiation. The cost of wind projects has risen all over the world and project developers are pushing for higher guaranteed prices. There are also questions over how BP will generate returns from its German North Sea assets, which almost doubled its wind pipeline in the quarter at a cost of almost €7bn for just the licences. 

Higher volatility in energy markets would shore up earnings in the current quarter, although oil and gas prices have dropped back in October. Refining margins remain weak, and Auchincloss said only a shock to supplies – possible given the Middle East conflict – would bring these up in the short term. Capex is confirmed around the bottom of the 2023 guidance of $16bn-$18bn, a positive for potential returns.  

The question now for shareholders is whether BP is right to remain on its transition track. Shareholders clearly value the bullish approach from the US giants, and even from Shell (SHEL) boss Wael Sawan, who is keen to underline his company’s commitment to pumping oil and gas. But the industry does have a recency bias, and forecasts are still for electric vehicles to take a chunk out of oil demand by the end of the decade, at least in the developed world. A quandary for the next BP boss. Hold. 

Last IC View: Hold, 490p, 1 Aug 2023