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Activist investors start with a simple enough idea: take an underperforming company, sometimes with too much debt. Push it to slim down. Hammer its remaining business into reasonable shape. And then enjoy a veritable gush of cash. That is a reasonable description of Elliott’s bet on beleaguered oil major BP. Yet sometimes the universe has other ideas.
BP reported earnings on Tuesday that were half what they were a year ago. That wasn’t because of the oil price, which was $65 a barrel on Tuesday, down from around $80 on average in 2024. Instead, the group was hit by lower profits from trading gas.
Still, the oil price matters. A handy rule of thumb sees BP losing $340mn of annual operating profit for every dollar off oil. Should Tuesday’s spot price be the average for the year, that alone would lop $5bn off last year’s underlying operating profit of almost $21bn. The shares are now down by a quarter compared with where they were in February, when Elliott popped up with a stake.
True, BP is hardly the only oil major to be hit by falling oil prices. And Elliott has hedged some of the so-called macro risk by shorting shares in rivals Shell and TotalEnergies.
But that still leaves Elliott, or any investor, exposed to some specific risks. First, BP has lots of debt — $27bn at the end of the first quarter, net of cash — though that number has been pushed up by temporary factors. Adding in hybrid bonds, an all-in figure is likely closer to $44bn, thinks Citigroup, or more than twice last year’s cash flow. That makes it particularly sensitive to oil price moves.
The second issue is that, to some extent, BP’s turnaround depends on the world remaining relatively predictable. Much of the expected value creation comes from the roughly $20bn of assets that it plans to sell by 2027. BP has made a solid start on this, signing agreements worth $1.5bn so far this year. But on-off tariff uncertainty has shrivelled the appetite for M&A, which may make it hard for BP to get top dollar for its wares.
Moreover, BP is trying to pivot back to oil and gas after its foray into renewables, but its high debt levels also dictate the pace. A burdened balance sheet, for instance, limits the company’s ability to acquire small oil and gas companies to replace its reserves, which dropped 13 per cent between 2022 and 2024.
BP boss Murray Auchincloss isn’t powerless amid the turmoil. He has trimmed investments and has plans to do more. Elliott, meanwhile, wants him to go even further — which is easier to do when times are bleak. The deeper the oil price sinks, the longer and harder BP will have to dig.
camilla.palladino@ft.com
