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There is a lot of doom and gloom priced into the BP (LSE: BP.) share price these days. On one level that’s understandable. After all, the business just posted its worst results in four years. However, with an activist investment fund recently taking a substantial holding, and a major strategy refresh due at the end of February, interesting times are ahead.
Increasing investment
Over the past year, the company has announced significant investment in 10 major projects, spanning its three reporting segments.
In gas and low carbon energy, one of its biggest approved projects is the $7bn Tangguh Ubadari carbon capture, utilisation, and storage (CCUS). Expected to begin operation and production from 2028, it will unlock 3trn cubic feet of additional gas in Indonesia.
In oil production and operations, its investment in Iraq’s Kirkuk oil and gas fields will total $25bn over the lifetime of the project. The fields were first discovered by a consortium, which included BP, 100 years ago. This fact will be key in unlocking the area’s estimated 9bn barrels of oil.
Profitability of renewables
There is little doubt that the market remains deeply sceptical of the company’s continued investment in renewables.
One of the main issues I have is that the renewables portfolio is not reported separately. Lumped into the gas and low carbon energy segment, assessing profitability of individual projects is therefore impossible.
But all is clearly not well. Back in December it divested itself of its offshore wind assets by entering into an equal joint venture with a Japanese company, JERA. Before that, it had already announced it was freezing new investment in wind.
Then there is Lightsource bp and Bunge Bionergia, its solar battery storage and biofuels businesses, respectively. These acquisitions helped push up net debt by $3bn. It has already acknowledged that it will need to bring in a partner for Lightsource. That tells me the path to profitability is going to be challenging, as with its wind assets.
BP future
Murray Auchincloss, the CEO, is coming under increasing pressure to close the valuation gap with US peers. It has already dismissed talk of moving its primary listing to the US. But what about a breakup of its assets?
The fear among the Board must be that this is what Elliott Management will be looking to do. Although the exact amount of its stake is unknown, Bloomberg has reported that its substantial.
During its full-year results presentation on 11 February, the company announced a major reset of its strategy at the end of the month. I quote: “It will be a new direction for bp, and NOT business as usual.”
Despite the negative headlines surrounding the company, I still remain very bullish on the outlook for the stock.
One issue I believe that is being completely overlooked by the market today, is an uncontrollable spike in oil prices. On a scale, I would put geopolitical risks at 10 today. It’s not just wars, but the slow unwinding of globalisation, and countries becoming increasing insular.
BP remains a well-run company with a huge portfolio of high-grade assets. Its share price weakness over the past year has presented a gift to value investors such as myself, which is why I continue to buy when finances allow.
