BP's "big reset"

"We now plan to fundamentally reset our strategy and drive further improvements in performance, all in service of growing cash flow and returns. It will be a new direction for BP,” CEO Auchincloss said.

WHAT: BP faces mounting investor pressure after Elliot Investment reportedly bought a stake in the UK major.

WHY: The UK major has trailed behind its peers in share price performance over the past year.

WHAT NEXT:  CEO Murray Auchincloss has promised a “fundamental reset” of the company’s strategy, due to be revealed on February 26.

BP’s leadership is facing mounting investor pressure following reports that Elliott Investment Management has acquired a stake in the company, raising speculation about potential structural changes. The revelation comes as BP’s annual profits fell by 35% in 2024, with CEO Murray Auchincloss pledging a “fundamental reset” of the oil major’s strategy.

Auchincloss declined to confirm any engagement with Elliott on an analyst call on February 11, stating only that BP does not comment on "market speculation." However, his remarks about the upcoming strategy shift – scheduled for announcement on February 26 – fuelled expectations that BP may pivot even further back toward oil and gas, Bloomberg reported on February 11.

Elliott’s involvement has sparked discussions over whether BP will undergo a more radical transformation. The hedge fund is known for pushing for major strategic overhauls in companies where it sees underperformance or missed opportunities, and BP’s lagging stock price compared to its rivals has made it a potential target.

BP’s shares rose on February 10 following reports of Elliott’s stake, as investors anticipated the fund’s influence could accelerate or deepen strategic reforms, according to Reuters on February 11. However, by 15.00 GMT the following day, BP’s stock had declined 0.9% to GBP4.6085 ($5.73) per share as markets digested its weaker-than-expected earnings results.

Income decline

BP reported 2024 profits of $8.9bn, a significant drop from the record highs of the previous two years, when soaring energy prices driven by post-pandemic recovery and geopolitical disruptions boosted oil majors’ earnings. The company’s fourth-quarter profits declined by 61% year on year, hitting their lowest level since Q4 2020.

BP attributed the decline to weaker refining margins, higher turnaround activity, and lower trading results. For the October-December period, its replacement cost (RC) profit – a key metric BP uses as a proxy for net income – stood at $1.169bn, down from $2.99bn a year earlier. Analysts had forecast $1.2bn, meaning BP fell slightly short of expectations, according to CNBC.

BP’s capital expenditure in the fourth quarter was $3.7bn, compared with $4.7bn in the same period of 2023. Meanwhile, net debt rose to nearly $23bn, marking a 10% increase y/y.

Despite these challenges, BP announced a $1.75bn share buyback for the fourth quarter, extending its repurchase programme into the first quarter of 2025. However, analysts remain cautious about the future pace of buybacks, with RBC Capital Markets suggesting the company may reduce its repurchase programme beyond Q1, as noted by CNBC on February 10.

A key factor behind BP’s earnings decline has been weaker refining margins, which fell to $13.1 per barrel in Q4, down from $18.5 per barrel a year earlier, according to Reuters on February 11.

The company expects continued pressure on refining margins in the first quarter of 2025, along with lower upstream production due to divestments in Egypt and Trinidad, CNBC reported. BP also faces currency-related risks, with earnings sensitive to the strength of the US dollar, given the pricing of commodities in global markets.

What to expect from the big reset

Auchincloss signalled a decisive shift in BP’s approach, stating: "We now plan to fundamentally reset our strategy and drive further improvements in performance, all in service of growing cash flow and returns. It will be a new direction for BP."

BP’s transition strategy under previous CEO Bernard Looney had emphasised a shift toward renewables, but investors had expressed scepticism over whether this approach could generate returns comparable to traditional oil and gas operations. Since taking over as permanent CEO in January 2024, Auchincloss has scaled back investments in low-carbon energy and signalled a renewed focus on oil and gas.

BP has already halted 30 projects globally while sanctioning 10 new ones, including developments in Iraq and India, Auchincloss noted in the February 11 analyst call. He also underlined BP’s efforts to improve refining performance and optimise capital allocation across its portfolio.

BP’s February 26 Capital Markets Day is expected to provide a clearer picture of the company’s long-term direction. Analysts, including Morningstar’s Allen Good, anticipate BP may announce: a reduction in spending on renewables, aggressive overall cost-cutting measures and increased investment in hydrocarbons to drive production growth. In particular, Auchincloss has also suggested boosting US shale gas output, noting that returns in the basin have outpaced those of oil in recent months.

Management under scrutiny

BP’s underperformance compared to rivals like Shell has heightened scrutiny on Auchincloss and his leadership team. The company’s shares have declined by around 9% over the past year, versus a 6% gain for Shell, according to CNBC on February 10. US oil majors have generally performed even better than their European peers over the last years – a trend attributed to their more cautious approach to investments in renewables and low-carbon technologies.

Investor concerns have also led BP to reduce executive bonuses, cutting senior leadership payouts to 45% of their targets, after missing financial goals for 2024, Reuters reported on February 11.

BP’s struggles reflect a broader trend among global oil majors, as energy prices have retreated from 2022 highs. But the company’s performance in 2024 was weaker than many of its peers, adding to the urgency for a strategic course correction.

Meanwhile, speculation remains over whether BP could become a takeover target, though its GBP74bn market capitalisation makes it a challenging acquisition. Last year it was revealed that the UAE’s ADNOC had considered making a bid for the company, but ultimately decided against it.

With activist investor Elliott Investment Management now involved, pressure is mounting for Auchincloss to deliver decisive action that reassures markets and drives higher returns. While the full scope of BP’s "fundamental reset" remains unclear, early signals suggest a shift away from its previous integrated energy approach, with a renewed focus on oil and gas investments. Whether that is enough to satisfy investors and activist stakeholders remains to be seen.