BP looks like a sitting duck for a takeover

The green blob was quick to sneer at Bluebell Capital Partners last month when this obscure little fund manager had the temerity to suggest that BP should be run as an oil company. Bluebell controls a tiny slice of BP’s share capital, so its views as an activist investor can be safely ignored by the “continuity” management.

The company’s strategy, instigated by Bernard Looney before he was defenestrated, is being carried on by Murray Auchincloss, his successor, as if nothing had happened and there is no need to change anything. Broadly, it is to progressively replace the output of oil and gas by renewables, and to cut hydrocarbon output by 25 per cent of the 2019 total by 2030.

As Bluebell points out: “This irrational strategy has, quite understandably, depressed the value of BP’s share price.” The world is learning the hard way that harnessing the sun and wind is neither cheap nor reliable. Worse still, the returns on these projects are a long way below those from finding oil and gas, as BP (and others) admit. 

It is unlikely that Bluebell will get much credit for pointing out the emperor’s lack of clothes. The Financial Times is almost painfully on-message when it comes to renewables v. hydrocarbons. The bigger investors in BP have too much staked on ESG and the fashion for the “climate catastrophe” trope to stick their necks out. They would not fancy the nasty publicity from a different sort of activist, either. Better to get the warm glow from following the herd into the greenery.

BP is not alone in being caught transitioning, although its two-way stretch is proving more painful than for other oil majors. The problem for all of them is that hard-won expertise in extracting oil and gas is not easily transferred to windmills and solar. One of the lessons of last year is that it is really hard to make serious money here, whether supplying or operating, which is not encouraging for investors in the hybrid model.

Rather than just muddling on, BP could allow the market to decide, either by a policy of distributing maximum dividends to the owners of the capital, or by formally splitting into a debt-laden oil company and a cashed-up renewables business. Something similar has been tried with reasonable success in the mining industry, splitting coal away from metals.

Unfortunately, this logic is unlikely to prevent the other type of activist from attacking the oil company, raising the now-familiar pressure to just stop oil, and since the top executives would be in charge of two smaller companies, they might have to take a pay cut.

In its current state, BP looks like a sitting duck for a takeover. Fortunately for Mr Auchincloss Exxon, the obvious buyer, has just spent $60bn on buying a fracking business. Currently valued at £80bn, BP would surely have been a better buy.