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Elliott Management is pressing BP to increase its free cash flow by an additional 40 per cent through deep cuts to spending, as the activist investor upped its stake in the energy group to more than 5 per cent and sharpened its criticism of the company.
The US-based hedge fund has told BP that the “fundamental reset” outlined by the oil and gas group’s chief executive Murray Auchincloss in February does not go far enough and presented an alternative plan, according to people familiar with discussions.
Elliott is urging BP to shift its focus from growing its oil and gas business to prioritising a target of $20bn in annual free cash flow by 2027, according to people familiar with discussions. This represents a 40 per cent increase on the target implied in February when BP revealed its pivot away from renewables and a more than doubling of its “adjusted” free cash flow of $8bn last year.
“Murray has taken 18 months to come up with a three-year plan that’s neither ambitious nor urgent,” said a person familiar with Elliott’s thinking. “Time is not on BP’s side here, with the macroeconomic environment and with investor patience running out. The continued underperformance of BP makes it open to a takeover.”
BP announced on Tuesday that Elliott had increased its stake to just over 5 per cent, worth about £2.8bn, putting its shareholding on a par with Vanguard, the company’s second-biggest investor. BP shares have fallen by about 18 per cent since the new strategy was announced, reducing its market value to £57bn.
The hedge fund believes BP has a route back to a higher valuation if it can be more disciplined in its spending, reducing capital expenditure to $12bn a year rather than the $13bn to $15bn range set out by the company, the people said. Elliott also thinks BP could make $5bn of cost savings beyond its current target.
The activist also believes BP should sell its solar and offshore wind power businesses, and that there is room to cut spending across its oil and gas business because its future oil resources are sufficient. “In the oil and gas bit of the business, it is not about chasing growth, it is about being disciplined in investing,” said the person familiar with Elliott’s thinking.
Elliott has complained that management did not acknowledge the roots of the company’s problems, which go beyond the strategic pivot away from renewables, the people said.
“Management’s diagnosis was it was all about vibes and atmospherics. Elliott’s diagnosis is that it’s also about how poorly they have executed over the past few years, how they have let costs build up. It is an execution story,” a person familiar with Elliott’s view said. They added there was reason to believe there should be wider changes in BP’s personnel beyond the planned departure of Helge Lund, the chair.
A quarter of BP shareholders voted against Lund’s re-election at the company’s annual meeting last week, reflecting investor frustration at the underperformance.
Examples of its poor capital discipline at BP included the overspending at its Tortue LNG project in Senegal and the high costs that partner Devon Energy citied when it withdrew from a shale oil joint venture in the US, the people said. They also said excessive spending at BP’s $4bn US biogas business was risky given the fuel’s dependence on federal tax credits and uncertain market prospects.
BP and Elliott declined to comment.
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