An impending ban on new petrol cars and the government’s plan to review drilling licences could spell the denouement of oil supermajors such as BP PLC (LON:BP), if they fail to capitalise on market disruption and diversify in step with the energy transition.
BP revealed on 16 January that it will cut 7,700 jobs across its business, equating to more than 5% of its global workforce, in pursuit of “value”, just a day after the energy secretary said the UK government will consult on plans to cut new oil and gas licences.
The oil company’s chief executive Murray Auchincloss, who took the helm last January, was accused by analysts this month of delaying its Capital Markets Day to late February to “avoid scrutiny”.
In a letter to employees, explaining the headcount reduction, Auchincloss highlighted a need for the business to accelerate in the energy transition.
“We are uniquely positioned to grow value through the energy transition. But that doesn’t give us an automatic right to win,” Auchincloss told employees. “We have to keep improving our competitiveness and moving at the pace of our customers and society. That’s what we are doing.”
The CEO of BP said the company has “stopped or paused” 30 projects across its business since June, as it focuses its resources on its “highest value opportunities”, after beginning a multi-year programme to “simplify and focus BP” last year.
© Bloomberg‘Rome burns’
Panmure Liberum analyst Ashley Kelty described the axing of staff at BP this month as the “first step” in the board’s plan to “cut costs in order to boost returns”, after the company unveiled a target to make $2bn (£1.6bn) of annual savings by the end of next year.
He predicted greater scrutiny of the company’s boss as “investors start to lose patience” at the company’s decision to focus on staff cuts to reduce costs rather than improving “top level margins”, a distraction while ‘Rome burns’.
BP unveiled the staff cuts on the day after energy secretary Ed Miliband said the UK government would launch a review of new oil and gas licences in the UK, indicating that he would stand by Labour’s commitment not to issue any new drilling licences in the North Sea.
In October, BP issued a profit warning for the third quarter of the year indicating that oil trading had slumped, while electric-vehicle charging was expected to be a growth area for the multinational business.
The company said it was expecting a $600m decline in oil refinery profits in the third quarter, but that it anticipated “margin growth” across charging business bp pulse in 2024.
© BloombergBP is due to post its financial results for the fourth quarter of 2024 on 11 February, in which analyst consensus is that it will generate profits before interest and tax of £3.81bn, compared to £3.57bn in the same period of 2024.
But analysts also predict that it will generate £1.26bn of underlying profit, less than the £2.99bn generated in the same period last year.
BP said in October that it predicted higher volumes in convenience customers as well as growth in its profit margin for its Pulse electric vehicle charging network for the year.
Last week, on 14 January, the company updated its guidance for the fourth quarter. It said upstream production would be lower on a quarterly basis, with slumps in oil production, operations and in its gas and low carbon segment despite realisations of up to $0.2bn in that segment.
It also predicted registering an up to $2bn impairment charge in the fourth quarter across sectors.
The oil company warned that its oil trading result “is expected to be weak” for the period, following lower realised refining margins in the range of $0.1bn to $0.3bn and a higher impact from turnaround activity.
In light of prevailing market conditions, this was not so surprising. Oil and gas resources are finite and declining. In the North Sea, where BP remains a major producer and the second biggest tax payer, the basin is in decline and UK demand for oil is projected to plummet by 2050.
BP’s vice president Doris Reiter warned in September that the “basin will lose out” on jobs, as the North Sea faced a “cliffhanger” ahead of the autumn budget.
Following pressure from shareholders, the oil company has been relatively slow to progress in the energy transition, with Auchincloss scaling back several of former CEO Bernard Looney’s low carbon commitments after he left the company due to undisclosed relationships with staff.
Analysts have called the course originally chartered by former CEO Looney as “value destructive”.
Short-termism
BP’s share price has fallen 13.5% in five years, edging down 2.84% this week to 420.45 pence each, whereas Shell PLC (LON:SHEL) has comparatively risen by 21.22% to €31.56 over that period.
Allen Good, an analyst at Morningstar Investment Services who cut his rating on BP last year, attributed shareholders being spooked by uncertainty around the company’s approach to the sustainable-energy transition. However, investors also deplore short-termism.
Shell’s chief executive Wael Sawan promised a “ruthless” focus on generating returns, retiring a goal of reducing net carbon intensity 45% by 2035 last year and watering down its emissions-reduction target for oil to 15-20%.
© BloombergLast spring, Shell sold its renewable power supply business Shell Energy to the UK’s incumbent supplier Octopus Energy, which has overtaken British Gas as the dominant supplier in the domestic energy market.
However, Shell’s 2024 energy transition plan, which cited “uncertainty in the pace of change in the energy transition”, also included a pledge to grow its electric vehicle charging network and maintain its position in biofuels.
Shell’s chairman Andrew Mackenzie said: “As the energy transition progresses, we expect to sell more low-carbon products and solutions, and less oil products including petrol and diesel.”
By contrast, Auchincloss has reinforced a focus on going capex-light through reducing capital on investments, as the cost of debt has continued to mount for energy-intensive industries.
Highlighting the pressure BP is under from investors, Kelty said: “While cost reduction is sensible, and staff reductions make sense, we fear that the recent move by the company to postpone its CMD (capital markets day) suggests CEO Auchinloss is trying to avoid scrutiny, and there will not be the strategy pivot away from low-margin renewables projects back towards traditional energy projects.”
Both BP’s Auchincloss, and the leadership team at Shell, remain hostage to shareholder sentiment, with investors typically preferring streamlined businesses, while recognising the need to diversify to future-proof respective businesses.
In October, BP completed its acquisition of utility-scale solar and battery storage company Lightsource BP.
Then it carved out its offshore wind assets in a bid to reduce capital expenditure in a tie-up with a Japanese producer in December, following which its head of offshore wind Matthias Bausenwein announced his resignation.
© Supplied by BPAuchincloss is expected to unveil his strategy for the company at the delayed capital markets day event in London on 26 February, two weeks after it reveals its full-year results. Analysts predict he will confirm a slow-down of investments in its low-carbon energy segment and highlight a focus on higher-return oil and gas projects.
But major policy shifts in downstream usage, in the move to electric vehicles, will dictate market shifts in the coming years – although this sector is also facing its own challenges.
The UK government will introduce a ban on the sale of new diesel and petrol cars from 2035, including liquid petroleum gas. It wants a majority of cars, 80%, to be electric within just five years.
Electrical and energy infrastructure trade body Beama criticised the government for risking billions of investment by pushing back its electric vehicle targets in November.
Pod Point, a charging company, has said that a consequence of the UK government’s ban will be that “demand for petrol and diesel will eventually reduce, meaning supply will likely drop, too”.
Although electric vehicles may be the future, the move to electric cars and vans is also experiencing a stuttering start.
Alarm bells shook the industry when Swedish battery maker Northvolt confirmed bankruptcy in November.
In a trading update this week on Monday, Pod Point said that adjusted loss in earnings before interest, taxes, depreciation and amortisation (Ebitda) is expected to mount to £14m.
The company, which counts EDF as a shareholder, cited “ongoing weakness in the private new car segment of the EV market” that it said continues to “affect trading” and resulted in lower-than-expected revenues of £53m, against guidance of £60m.
Portending a rocky few years ahead for the fledgling industry, its chief executive Melanie Lane said a “weaker-than-expected private EV market has negatively impacted revenues”.
