BP yet to make its profitability case with 25% fewer barrels

Over the past few years of energy transition efforts, BP, alongside peer Shell, has tripped over the disappointing cash-burning reality of low carbon ventures. The rush to ditch fossil fuels ASAP simply doesn't fly without a profitable upstream Oil & Gas business to sustain green investments in the long run. Instead, the green splurge has greatly contributed to the infamous 'valuation gap' between EU and US oil majors, with BP stranded in the slow lane.

Why is BP a laggard?

In a word, BP's strategy shuffle shuffled them to the back of the pack. BP’s underperformance is not a historical fact. As the third-largest Oil major in Europe, BP produces 2.3million barrels of hydrocarbons per day in over 20 countries, all at a bargain cost of c.$6 per barrel. Despite the fallout from the disastrous Deep Horizon oil spill in 2010, BP managed to keep up with its peers in terms of price performance, riding on the highly prolific nature of its business. 
However, when Bernard Looney took the CEO reins in 2020, the company announced a radical strategic pivot, pledging to slash its hydrocarbon production by a whopping 40% by 2030 vs. its 2019 level and redirect capital into low carbon ventures. This move didn't sit well with investors, and it fared even worse when those green initiatives failed to generate the expected cash flow. As a result, BP has been playing second fiddle ever since. 

Twists & turns impact share price.

In February 2023, BP stunned observers once more by dialing back its production reduction goal from the previous lofty 40% to a modest 25%. The signal of "more oil" combined with a dividend boost sent BP's shares soaring to record highs on the back of record profits in FY22.
However, this flip-flop in strategy irked many investors, particularly those focused on climate issues. More importantly, it cast doubts over the company's governance capabilities, a concern further exacerbated by CEO Looney's later shock departure over undisclosed relationships with colleagues. 

Lonely is the path to fewer fossil fuels
In the wake of low-carbon losing game, BP and Shell, under their respective newly appointed CEOs: Murray Auchincloss (appointed in Jan. 2024) and Wael Salwan (appointed in Jan. 2023), took divergent paths. 
While Shell’s Wael Salwan went at it hammer and tongs: abandoning his predecessor’s pledge to shrink production and slashing low carbon/renewable capex, BP’s Murray Auchincloss chooses to stick to his predecessor’s green goals without risking shareholder returns by adopting a “more pragmatic” approach. 

A US-themed upstream revamp by decade-end.

In our view, BP’s long-term profitability is underpinned by its highly prolific, low-cost global upstream business via its own operated assets and bpx energy (BP’s US onshore oil and gas business).

BP’s peer-matching upstream production volume boasts a 48% liquid weight.

The company’s long-term upstream grit is further supported by BP’s deep reserve pocket (steadily-above-100% reserve replacement ratio) and advantageously low production cost at $5.78/bbl (FY23). As the company sets its sights on a 25% reduction in upstream production by 2030, BP will concentrate on developing high-margin, low-cost barrels to upgrade its upstream portfolio.
Building on an already significant presence (5 production platforms as of Apr. 2024) in the most-coveted Gulf of Mexico, BP is actively developing its100%-owned Paleogene resources, out of which Kaskida holds c.4bn barrels of oil in place and has the potential for first oil in 2028 at a production capacity of 150kb/d. Meanwhile, BP’s high-margin US onshore upstream business is targeting at doubling its production levels of 2022/reaching 650k boe/d by 2030. If all goes as planned, we note that nearly half of BP's production could come from its US onshore and offshore interests by the end of the current decade.

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