bp: Dangled in the “G” anomaly after CEO’s sudden departure begs questions
In an unexpected move, bp announced CEO Bernard Looney’s resignation over his failure to disclose transparently the number of past relationships with colleagues. He will be replaced by CFO Murray Auchincloss on an interim basis. Looney took over the job in early 2020 and immediately introduced a strategic overhaul that should drive the company through the energy transition and towards a net zero path. While the overall strategy of the company may not change, the CEO’s surprising departure (should) raises questions.
Fact
• bp’s CEO Bernard Looney resigned in an unexpected move after taking office less than four years ago (February 2020).
• The company said in a statement that Looney failed to disclose transparently the number of past relationships to the board prior to becoming CEO and violated the company’s code of conduct.
• The statement also added an investigation is underway but did not state whether the results will be communicated to shareholders.
• CFO Murray Auchincloss will replace Looney on an interim basis.
• bp did not share any details on the board’s plans for the next course of action.
• The shares declined 1% in the London market – not a big reaction to the news.
Analysis
A governance anomaly at bp
If Bernard Looney were the first bp CEO to leave prematurely, there would be no reason to point out a “G” problem in bp’s ESG metrics. Yet, he is the third one after John Browne (the man who re-created bp) in 2007 after a personal matter became public and Tony Hayward (one of Browne’s disciples) in 2010 following the oil spill in the Macondo Prospect.
The way the three resignations were handled should raise questions about the disciplined and measured governance at bp. Such C-suite matters and succession plans are prepared over long periods at Big Oil companies. Nothing is left to the whims of fate and the market does not usually see premature departures. Street analysts and shareholders can guess who will replace Patrick Pouyanné at TotalEnergies or may start soon speculating about the potential future CEO of Shell after Wael Sawan.
bp’s statement, however, lacked three critical points:
i) The course of action the board will take to announce the new CEO. The appointment of the CFO as interim CEO does not count.
ii) Why did Looney leave before the conclusion of an ongoing inquiry? Or when will the investigation be concluded and whether the results will be shared with shareholders?
iii) Most importantly, the company failed to send a clear strategic message on whether the board remains committed to executing the current transition plan and increasing shareholder returns. Without counting too much on the current price-driven support, the board should give a clear message of stability, at least for cash generation and shareholder remuneration.
The Future: a big unknown
bp’s statement left the market in suspension as to which direction the company could go. Will bp adopt a more radical embrace of its core business like Shell’s CEO Sawan did and be more rewarded for it? Or will the company reiterate its commitment to the 25% reduction in oil and gas output and remain fully convinced of the cash generation potential of its transition businesses? Therefore, the selection of the new CEO will be extremely important to relay the message. Until then, the stock may face some pressure in the market, only to be saved by high oil prices?
While we believe the company is in dire and urgent need of clearly outlining its strategy, Auchincloss as interim CEO is a reassuring choice as he is in command of the company’s operations and assets. His performance during conference calls and handling investors and analysts was quite impeccable.
At this point, it is difficult to guess who Looney’s replacement might be. In the case of an internal appointment, strong candidates include Upstream EVP Gordon Birrell, who has been doing an impressive job and will be the man of the show at the oil and gas capital markets event in Denver next month. Another candidate is Carol Howle, EVP of bp’s successful trading arm. Her immense experience in trading across assets could steer the company and could unlock more opportunities in emerging renewable businesses.
Complicated management during turbulent times
When he took over the job in a very tumultuous time – at the onset of COVID-19 – Bernard Looney announced a strategic transformation of bp. It was almost a metamorphosis – compared to the energy transition and net zero strategies announced by peers later. Looney’s path aimed at turning bp into an integrated energy company and reducing oil and gas production by 40% by 2030.
Shareholders, however, did not embrace the strategy, finding it too impetuous and hardly cash-generative to support returns, thereby putting added pressure on the stock with the fire sale triggered by Covid.
With the changing market conditions exacerbated by Russia’s invasion of Ukraine in 2022, Big Oil companies capitalised on the opportunity to highlight their core (oil and gas) business to deleverage and maintain high cash returns and valuation while scrapping low return or loss-making renewable energy projects. In this context, Looney re-labelled bp’s strategy as “leaning back” – which meant a 25% reduction in hydrocarbon production instead of the previously committed 40% and spending less on low-return renewable power projects while focusing on mobility and convenience.
The recent shift in the strategy was welcomed by the market as the shares also found support in oil prices. Yet, we prefer to remain sceptical about how much of the recent upside movement came from the intrinsic value of good strategic execution or was simply driven by market sentiment.
While bp clearly has lagged Integrated Oils under our coverage since Looney took over in 2020, the company’s total shareholder return since then also disappoints compared to other Big Oil companies.
Source: AlphaValue
Source: AlphaValue, Company reports
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