Author: Ricardo Perez

Climate experts have warned that continued investments in fossil fuels will create the risk of assets worth $557 trillion being left useless by 2050

Some of the world’s biggest oil companies are abandoning promises to shift to renewable energy, and planning to expand their fossil fuel exploration despite growing call for an urgent energy transition.

Top energy companies including BP, Shell, Exxon and Chevron doubled down on oil and gas in 2024 to focus on near-term profits.

That shift came at the cost of their plans to decarbonise — a trend that is on track to continue into 2025.

European Big Oil firms BP and Shell sharply slowed their plans to spend billions on wind and solar power projects this year and shifted spending to higher-margin oil and gas projects.

That was despite both firms lobbying for billions of dollars in subsidies for carbon capture, a climate technology aimed at capturing CO2 emissions from large sources, such as oil refineries. Climate experts say the technology cannot be a substitute for targeted emission reductions.

BP, which had aimed for a 20-fold growth in renewable power this decade to 50 gigawatts, announced in December it would spin off almost all its offshore wind projects into a joint venture with Japanese power generator JERA.

Shell, which once pledged to become the world’s largest electricity company, largely stopped investments in new offshore wind projects, exited power markets in Europe and China and weakened carbon reduction targets.

Shell told Reuters it remained committed to becoming a net zero emissions energy business by 2050 and continues to invest in the energy transition.

Meanwhile, Norway’s state-controlled Equinor also slowed spending on renewables.

BP, Shell and Equinor reduced low-carbon spending by 8% in 2024, Rohan Bowater, analyst at Accela Research, told Reuters.

Similarly, American big oil firms Exxon and Chevron have also firmed up their commitment to fossil fuel expansion.

Early this month Exxon Mobil said it was looking to increase its oil and gas output by 18% between 2026 and 2030. It is looking to increase its earnings by 2030 by $20 billion over this year’s projected $34.2 billion.

Meanwhile, Chevron increased its oil and gas volumes by 7% year-over-year, while planning to cut back spending on low-carbon projects by 25%.

Both Exxon and Chevron are now planning to enter the electricity business eyeing increasing energy demands at data centres, fuelled by an artificial intelligence boom. The firms are looking use natural gas to power the technology industry’s AI data centres.

Researchers say the carbon footprint of natural gas is 33% worse than that of coal.

Faltering policies

The retrenchment by oil majors comes after governments around the world slowed the rollout of clean energy policies and delayed targets as energy costs soared following Russia’s full-scale invasion of Ukraine in 2022.

European oil giants that had invested heavily in the clean energy transition found their share performance lagging US rivals Exxon and Chevron, which had kept their focus on oil and gas.

“Geopolitical disruptions like the invasion of Ukraine have weakened CEO incentives to prioritise the low-carbon transition amid high oil prices and evolving investor expectations,” Accela Research’s Bowater said.

Meanwhile, Equinor blamed supply-chain bottlenecks and high prices for its slow moves on wind energy.

“The offshore wind segment has been through demanding times in the last couple of years due to inflation, cost increase, bottlenecks in the supply chain,” Equinor told Reuters.

The company “will continue to be selective and disciplined in our approach,” it added.

The scenario is the same in the US, where both Exxon and Chevron have blamed a lack of “clarity” on rules on energy subsidies for holding back investments in climate technologies and renewables.

Tougher days ahead

Global heat-trapping carbon emissions are forecast to climb to a new high in 2024, which will be the warmest year on record.

And 2025 is shaping up to be another tumultuous year for the $3 trillion energy sector, with climate-sceptic Donald Trump returning to the White House.

China, the world’s biggest crude oil importer, is also trying to revive its faltering economy, potentially boosting oil demand.

Meanwhile, Europe also faces continued uncertainty over the war in Ukraine and political turmoil in Germany and France.

All those tensions were laid bare at the annual United Nations climate conference in Baku in Azerbaijan in November, when the host country’s President Ilham Aliyev, hailed oil and gas as “a gift from God”.

That summit yielded a global climate finance deal but disappointed climate advocates who had hoped governments would coalesce around a phase-out of oil, gas and coal.

The energy companies will be watching to see if Trump follows through on promises to repeal President Joe Biden’s landmark green energy policies, which have spurred investments in renewables across the United States.

Trump has vowed to remove the United States from global climate efforts, and has appointed another climate sceptic, oil executive Chris Wright, as his energy secretary.

Oil and gas pitfalls

Despite those concerns, however, there are potential pitfalls in the energy majors’ renewed emphasis on oil and gas.

Demand growth in China, which has driven global prices for two decades, is slowing, with growing signs that its gasoline and diesel consumption is plateauing.

At the same time, OPEC and top oil producing allies have repeatedly delayed plans to unwind supply cuts as other countries, led by the United States, increase oil output.

As a result, analysts expect oil companies to face tighter financial constraints next year. Net debt for the top five western oil giants is expected to rise to $148 billion in 2024 from $92 billion in 2022, based on LSEG estimates.

There is also mounting regulatory pressure on oil companies, with states like New York planning to fine fossil fuel companies a total of $75 billion over the next 25 years to pay for damage caused to the climate.

Meanwhile, climate experts have warned that continued investments in fossil fuels create the risk of assets worth $557 trillion being left useless by 2050.

Researchers say no new fossil fuel projects are needed for the world to reach net-zero emissions by the middle of the century.

By: Vishakha Saxena, Asiafinancial / 8 January 2025

Lipow Oil Associates President Andy Lipow discusses 2025’s global oil outlook under the upcoming Trump administration on Catalysts.
OIL.

Lipow identifies Trump’s expected deregulation policies and “drill baby drill” stance as potential catalysts for increased oil production efficiency.
However. he warns of “the biggest impediment” to reaching substantial
growth this coming year. The global oil market already faces oversupply heading into 2025.
The oil market is not particularly concerned about supply over the next few years, especially in an environment where Chinese oil demand growth has disappointed,” he tells Yahoo Finance, highlighting Chinas lower-than-expected consumption in 2024.
Regarding industry consolidation under Trump. Lipow notes. “There’s not many large players left.” Nevertheless, he emphasizes that oil producers must consolidate to enhance operational efficiencies.

By: Oil Companies News / 08 January 2025

Valero Energy Corporation (NYSE:VLO), a leading independent petroleum refining and marketing company with a market capitalization of $39.31 billion, finds itself at a critical juncture as it navigates a complex landscape of market dynamics, regulatory pressures, and evolving energy demands. According to InvestingPro analysis, the company maintains a strong financial health score of 2.86, indicating good overall operational stability. This comprehensive analysis delves into the company’s recent performance, strategic positioning, and future prospects, offering investors a nuanced view of Valero’s potential in the ever-changing energy sector.

Financial Performance and Market Position

Valero Energy has demonstrated resilience in its recent financial performance, with second-quarter earnings surpassing expectations. The company’s results were 2% above Barclays (LON:BARC)’ estimates and 4% above consensus estimates, indicating strong operational execution and market positioning. Trading at a P/E ratio of 10.99 and currently near its 52-week low, InvestingPro analysis suggests the stock may be undervalued relative to its Fair Value. Discover more insights about VLO’s valuation on our undervalued stocks list. This outperformance suggests Valero’s ability to capitalize on favorable market conditions and efficiently manage its diverse portfolio of assets.

The company’s market capitalization of approximately $51.34 billion reflects its significant presence in the energy sector. Analysts project earnings per share (EPS) for the first fiscal year (FY1) at $13.12, with an increase to $16.79 for the second fiscal year (FY2). These projections underscore expectations of continued growth and profitability for Valero in the near term.

Demand Dynamics and Industry Outlook

Valero has experienced solid demand across its wholesale footprint, a positive indicator of the company’s market strength and the overall health of the energy sector. This robust demand profile aligns with analysts’ expectations of a potential increase in refined product consumption, which could drive stronger crack spreads and bolster Valero’s financial performance.

Looking ahead, the refining sector is anticipated to return to an enhanced mid-cycle environment by 2024. Historical mid-cycle refining EBITDA multiples have ranged from 4-6x, providing a benchmark for valuation considerations. This outlook suggests a potentially favorable operating environment for Valero in the coming years, although it is tempered by concerns over lower-than-expected benchmark cracks observed during the recent summer period.

Capital Allocation and Shareholder Returns

Valero’s capital allocation strategy has been notably shareholder-friendly, with the company repurchasing $1 billion of its stock. InvestingPro data reveals that management has been aggressively buying back shares, while maintaining an impressive 36-year streak of consecutive dividend payments, currently yielding 3.42%. This demonstrates a strong commitment to shareholder returns, supported by the company’s healthy current ratio of 1.57, indicating strong liquidity to meet short-term obligations. This significant buyback reflects an 87% payout ratio, demonstrating management’s confidence in the company’s intrinsic value and commitment to returning capital to shareholders. Such aggressive share repurchases can potentially enhance earnings per share and signal to the market that the company views its stock as undervalued.

Segment Analysis and Valuation

Valero’s diverse portfolio, which includes refining, renewable diesel, and ethanol segments, provides a balanced approach to the energy market. Analysts have applied different multiples to each segment in their valuation models, reflecting the varying growth prospects and risk profiles:

Refining: 6.5x multiple

Renewable Diesel: 10x multiple

Ethanol: 10x multiple

These multiples, applied to 2025 EBITDA estimates by segment, form the basis for the sum-of-the-parts analysis used in determining price targets. The higher multiples assigned to renewable diesel and ethanol segments suggest greater growth expectations and potentially higher margins in these areas compared to traditional refining.

Industry Challenges and Opportunities

The refining industry faces a complex set of challenges and opportunities. On one hand, there is potential for higher refined product demand and stronger crack spreads, which could benefit Valero’s core business. On the other hand, risks such as reduced global GDP growth could lead to lower demand for refined products, impacting the company’s performance.

Additionally, the industry must contend with the possibility of excess refining capacity supply growth, which could pressure margins. Economic or regulatory changes that affect US oil-directed drilling or alter fuel specifications pose further risks to Valero’s operating environment.

Bear Case

How might reduced global GDP growth impact Valero’s performance?

A slowdown in global economic growth could significantly affect Valero’s financial performance. Reduced GDP growth typically leads to decreased demand for refined petroleum products, as industrial activity slows and consumer spending on transportation declines. This could result in lower sales volumes and compressed margins for Valero’s refining segment, which forms a substantial part of its business.

Furthermore, a global economic downturn might lead to increased competition among refiners for market share, potentially forcing Valero to operate at lower utilization rates or accept thinner margins to maintain its competitive position. The company’s renewable diesel and ethanol segments could also face headwinds if a broader economic slowdown reduces demand for biofuels or pressures government support for renewable energy initiatives.

What risks does excess refining capacity pose to Valero’s market position?

Excess refining capacity in the industry presents a significant challenge to Valero’s market position and profitability. When supply outpaces demand, refiners often engage in price competition to maintain market share, leading to compressed margins across the sector. For Valero, this could mean operating its refineries at lower utilization rates or accepting reduced crack spreads, both of which would negatively impact its financial performance.

Moreover, excess capacity can accelerate the closure of less efficient refineries, potentially leading to asset write-downs or increased costs associated with facility closures or conversions. While Valero’s diverse portfolio and operational efficiency may provide some buffer against these pressures, persistent overcapacity in the industry could erode the company’s competitive advantages and strain its profitability over the long term.

Bull Case

How could better-than-expected refinery utilization boost Valero’s earnings?

Higher-than-anticipated refinery utilization rates could significantly enhance Valero’s financial performance. Improved utilization typically indicates strong demand for refined products and efficient operations, allowing the company to spread fixed costs over a larger production volume. This operational leverage can lead to higher margins and increased profitability, particularly if coupled with favorable crack spreads.

Furthermore, high utilization rates often coincide with periods of tight supply in the market, which can support higher product prices and wider margins. Valero’s ability to maintain high utilization across its refinery network during such periods could result in substantial earnings outperformance relative to peers and analyst expectations, potentially driving stock price appreciation and improved shareholder returns.

What potential benefits could Valero see from its diverse portfolio in a strong mid-cycle environment?

Valero’s diverse portfolio, encompassing refining, renewable diesel, and ethanol segments, positions the company to capitalize on various market opportunities in a robust mid-cycle environment. In such a scenario, the traditional refining segment could benefit from strong demand for petroleum products and healthy crack spreads, driving solid cash flows and profitability.

Simultaneously, the renewable diesel segment could see increased demand as regulatory support for low-carbon fuels grows, potentially commanding premium pricing and higher margins compared to conventional diesel. The ethanol segment could also benefit from favorable blending economics and potential increases in biofuel mandates.

This diversification allows Valero to mitigate risks associated with any single segment and capitalize on growth opportunities across different energy markets. In a strong mid-cycle environment, the company could see synergies between its segments, optimizing its product mix to maximize overall profitability and potentially outperform less diversified competitors.

SWOT Analysis

Strengths:

Diverse portfolio across refining, renewable diesel, and ethanol segments

Strong wholesale footprint and market presence

Demonstrated ability to outperform earnings expectations

Robust capital allocation strategy, including significant share repurchases

Weaknesses:

Exposure to volatile refining margins and commodity prices

Dependence on favorable regulatory environment for renewable fuels

Potential vulnerability to economic downturns affecting fuel demand

Opportunities:

Expected return to enhanced mid-cycle refining environment by 2024

Potential for higher refined product demand and stronger crack spreads

Growth in renewable diesel market driven by increasing focus on low-carbon fuels

Possible expansion of ethanol blending mandates

Threats:

Risk of reduced global GDP growth leading to lower demand for refined products

Potential for excess refining capacity supply growth pressuring margins

Economic or regulatory changes impacting US oil-directed drilling or fuel specifications

Intensifying competition in the renewable fuels market

Analysts Targets

Barclays: $165.00 (July 26th, 2024)

Wells Fargo (NYSE:WFC) Securities: $165.00 (July 26th, 2024)

This analysis is based on information available up to July 26, 2024, and reflects the market conditions and analyst perspectives as of that date.

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To evaluate VLO further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if VLO appears on our undervalued or overvalued stock lists.

These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.

By: T&C. 12/17/2024

Wood Mackenzie’s report on Hydrogen: 5 things to look for in 2025 reveals the rise of blue hydrogen in the US, a giga-scale green project reaching FID, increased deployment of Chinese electrolysers, the mismatch between project FIDs and offtake contracts and a surge in low-carbon ammonia investments.

“We predict that the 45Q tax credit will remain in place due to strong support from the oil and gas lobby, and its importance in facilitating US exports of blue ammonia,” said Greig Boulstridge, research analyst for Wood Mackenzie. “As a result, we predict that a surge in blue hydrogen investment – with at least three large-scale blue hydrogen projects reaching FID – will see the US emerge as the world’s leading blue hydrogen producer.”

Dominance of Blue Hydrogen in the US

Blue hydrogen investments will surge in the US, supported by the 45Q tax credit and strong oil and gas lobbying.

At least three large-scale blue hydrogen projects, totaling over 1.5 Mtpa, are expected to reach Final Investment Decision (FID).

The US will solidify its position as the leading global producer of blue hydrogen, while green hydrogen faces significant challenges.

A Giga-Scale Green Hydrogen Project to Reach FID

Despite obstacles like securing offtakers and favorable regulatory conditions, at least one giga-scale green project (+1GWe) is projected to reach FID.

To date, only two projects larger than 1GWe have achieved FID, out of a proposed pipeline of over 150 projects.

Chinese Electrolysers Expanding Market Share

Chinese electrolyser manufacturers are set to capture over one-third of markets outside North America and Europe by the end of 2025.

Competitive pricing, manufacturing capacity, and shorter delivery times are driving their global expansion.

Persistent Mismatch Between Project FIDs and Offtake Contracts

A gap between FIDs and offtake agreements risks cancellations, particularly in the US, which accounts for a significant portion of uncontracted capacity.

Acceleration of agreements in Japan, South Korea, and Europe could help bridge this mismatch.

Surge in Low-Carbon Ammonia Investments

Investments in low-carbon ammonia are projected to double in 2025, reaching $8 billion.

Upstream: $5 billion targeting hydrogen applications in maritime and aviation sectors.

Downstream: $2 billion for ammonia storage terminals and $1 billion for large ammonia carriers.

Japanese firms are expected to lead, with increasing activity in export markets like Asia and Europe.

These themes signal a transformative year for the low-carbon hydrogen and ammonia sectors, with shifts in investment patterns, technological deployment, and global market dynamics.

By: Greentechlead / December 17, 2024

The Ministry of External Affairs (MEA) confirmed that Indian Strategic Petroleum Reserve Limited (ISPRL) is engaging with GCC nations for investments in phase two of the strategic reserves project.

Kuwait Petroleum Corporation (KPC) has expressed interest in participating in the second phase of India’s Strategic Petroleum Reserve (SPR) project, which aims to bolster the country’s energy security.

This development follows the MEA’s briefing to the Parliamentary Committee on External Affairs, where the details of Phase II were discussed with KPC in November 2022.

The ministry said in a response tabled in parliament: “Participation of Kuwait Petroleum Company in Phase II of the SPR programme of India is one of the new areas of cooperation being explored”.

The interest from KPC aligns with India’s plans to expand its strategic crude oil storage under phase two.

This expansion includes the construction of caverns with capacities of four million tonnes (mt) in Chandikhol, Odisha, and 2.5mt in Padur, Karnataka.

The project will be executed under a public-private partnership model, as sanctioned by the Union Cabinet in 2021.

December 5, 2024

Our latest view on key dynamics of Asia’s gas markets over the next decade

Economic expansion, urbanisation and population increases have already made Asia the key driver of global gas market growth over the past decade. So, what can be expected over the next ten years, and what investment opportunities will be created as a result? 

We recently published a new 10-year investment horizon outlook for global gas based on insight from our Lens Gas & LNG data analytics solution and a country-specific outlook for China. Fill out the form to access a PDF with key insights from these reports, or read a sample below. 

Global LNG prices will move lower on a wave of new supply 

With limited growth in domestic production  and a significant proportion of supply coming from imported liquefied natural gas (LNG), global LNG prices will be an important factor in Asian markets. Softening prices supported increased LNG demand in South and Southeast Asia in 2024, along with a return to LNG contracting in India. However, limited supply, amplified by geopolitical tensions, mean that prices will remain volatile in the short term.  

Looking ahead, a wave of new supply will bring about a structural change in the global LNG market from 2026. However, risks to supply growth mean we have upgraded our expectations for average LNG prices somewhat through to 2034.  

In China, a growing uncontracted demand gap in the market after 2026 will create additional opportunities for LNG sellers. Meanwhile, in Northeast Asia, despite flat overall demand, uncontracted demand will expand over time.  

Get more insight 

Fill out the form to access insights on: 

The explosive growth of emerging Asian gas and LNG markets. 

How infrastructure development and market reforms are driving strong expansion in China. 

This complimentary PDF also features a detailed chart on surging emerging Asian markets. 

By: woodmac / 09 December 2024.

Chevron U.S.A., Inc. (CUSA), a wholly owned subsidiary of Chevron Corporation (NYSE: CVX), has completed a retrofit of its refinery in Pasadena, Texas, which is expected to increase product flexibility and expand the processing capacity of lighter crudes by nearly 15 percent to 125,000 barrels per day.

Chevron acquired the Pasadena Refinery in 2019 with the strategic intent to expand its Gulf Coast refining system. This project is expected to allow the company to process more equity crude from the Permian Basin, supply more products to customers in the U.S. Gulf Coast and realize synergies with the company’s Pascagoula refinery.

The Light Tight Oil (LTO) Project aims to enhance facility reliability and safety and will ultimately result in an increase in the supply of refined products domestically. The refinery will also begin producing jet fuel and exporting gas oil.

“The Pasadena Refinery is on a journey to maximize value for Chevron and the community it serves by driving progress in safety and reliability,” said Chevron Manufacturing President Chris Cavote. “This refinery now firmly integrates our upstream and downstream businesses as we aim to optimize the value chain.”

Planning for the LTO Project began in 2019 with work beginning in early 2020.

“I’m extremely proud of our employee and contractor workforce, which logged over 4 million hours to complete this complex project in an operating refinery. Our safety program reinforced the focus on working safely throughout the project,” said Refinery General Manager Tifanie Steele. “We are investing in the refinery to help it be successful in the long-term, which we hope will support continuing positive economic impact to our community.”

The phased start-up of the asset is expected to last through Q1 of 2025 as project team members work to confirm all plants are operating as planned and products are developed to specification.

About Chevron

Chevron (NYSE: CVX) is one of the world’s leading integrated energy companies. We believe affordable, reliable and ever-cleaner energy is essential to enabling human progress. Chevron produces crude oil and natural gas; manufactures transportation fuels, lubricants, petrochemicals and additives; and develops technologies that enhance our business and the industry. We aim to grow our oil and gas business, lower the carbon intensity of our operations and grow lower carbon businesses in renewable fuels, carbon capture and offsets, hydrogen and other emerging technologies. 

By: Chevron / Dec. 10, 2024.

Horizon Terminals Ltd. (HTL), an Emirates National Oil Co. (ENOC) unit, has completed the Horizon JPUT Pipeline Connectivity Project in Singapore.

The project was undertaken by Horizon Singapore Terminals Pte. Ltd. (HSTPL) and Jurong Port Universal Terminal Pte. Ltd. (JPUT). ENOC said in a media release the project is a major milestone in HTL’s international expansion.

For Singapore, this means a major step toward petroleum infrastructure development, operational efficiency, and cost reduction, it said.

ENOC said the project involved the construction of a new pipe rack connecting both terminals, equipped with a 24-inch pipeline for Fuel Oil and a 20-inch pipeline for Clean Petroleum Products. The infrastructure, according to ENOC, will also mitigate operational risk, reducing transfer times between the two terminals and reducing costs for customers of both facilities.

HSTPL and JPUT have formed a partnership on Jurong Island, with the two terminals being built in 2006 and 2007, respectively. ENOC added that over the years, the partnership expanded with a mutual aid understanding and the construction of a firewater line in 2009, progressing to the current pipeline connectivity project, benefiting customers of both terminals.

“The successful completion of the Horizon JPUT Pipeline marks a pivotal moment not only for Singapore’s energy infrastructure but also for the region. This project strengthens our global footprint and reinforces ENOC’s position as a global energy leader”, Saif Humaid Al Falasi, Group CEO of ENOC and Chairman of HSTPL, said.

“This new infrastructure strengthens our partnership with Horizon Singapore Terminals, expands service offerings for our customers, and enhances the collaborative ecosystem between our terminals”, Loh Wei, CEO of JPUT, said.

The new pipeline reduces the reliance on short-range shipping operations, decreasing marine traffic at the port and increasing the safety of essential long-range vessel movements, ENOC said. Additionally, this development lowers carbon emissions, supporting more sustainable operations, it said.

By Paul Anderson, Rigzone Staff / Monday, December 09, 2024

The UK oil company’s future as a standalone entity is bleak. 

In the spring of 1998, with oil hovering near $10 a barrel, BP Plc reached a dismal conclusion: Its future as a standalone company was grim. So John Browne, its chief executive officer at the time, rang the chairman of US rival Amoco and proposed a merger. The deal, announced in August of that year, triggered a flurry of M&A activity that created the current Big Oil mob.

Today, BP is at a similar juncture. Its future alone is bleak. Investors have lost faith in its strategy, its management and its board. Even sell-side analysts, typically deferential to the companies they cover, are out for blood: Take the headline of a recent report by veteran analyst Paul Sankey that read “BP Results: Beat? Miss? Who Cares, Fire the Board.”

History doesn’t repeat, but it rhymes. BP Chairman Helge Lund needs to pick up the phone and seek a deal — effectively putting the company up for sale. If he plays it well, the oil major may get to call the resulting transaction a “merger of equals.” So who can he phone? Shell Plc, of course. Moreover, the UK government should encourage such a deal with the aim of keeping a Shell-BP company British and still listed in London.

BP executives may be pinning their hopes that a strategic update, scheduled for February, will revive the company’s fortunes. Lund was in the US last month sounding out institutional investors; my understanding is that they denounced the current strategy. In 2020, BP made a bet: oil demand had peaked, and the future was about reducing fossil fuel output and investing an ever-larger share of its budget in green electricity, primarily wind and solar power. Since then, the company has rowed back on its green strategy, but investors are demanding it refocus on its traditional strengths — oil and gas.

The damage to BP in recent years has been enormous. At about $75 billion, BP’s market valuation is a shadow of its previous might. In 2006, the company was worth $250 billion; even in 1998, before the merger with Amoco, it was worth $80 billion. Its stock-market performance has been horrid. BP is among the top-10 worst performers on the FTSE 100 blue chip index in the past 12 months. It doesn’t look prettier if one looks further afield — in the past five years, its shares are down 20%, compared with gains for its rivals of 10% to 70%. BP’s stock would be even lower if investors weren’t anticipating either an activist emerging or an M&A deal. But those opportunistic hedge fund bets won’t last for ever.

To be sure, the company is far from a basket case. Its Gulf of Mexico business is second to none and its trading capabilities are legendary. But it’s also carrying a lot of underperforming divisions, while its Russian business is so toxic that it’s impossible to value.

Importantly, BP is probably worth more as the sum of its parts than as a whole, offering an opportunity for any buyer to hang on to the assets it wants, and sell the rest: Private equity firms and sovereign wealth funds would be eager buyers of whatever a potential purchaser was willing to dispose of.

If the BP chairman did make the call, Shell CEO Wael Sawan should pick up the phone. The numbers would stack up even after paying a typical 30% premium. Synergies alone would generate billions of dollars of savings; when analysts at Barclays Plc did the sums on a fantasy BP-Shell merger, they came up with $7.5 billion in annual operating cost savings and a $5 billion reduction in capital expenditure, suggesting the transaction would pay for itself in a few short years.

Moreover, buying BP would resolve key problems for Shell; how to sustain growth after 2030, and how to add exposure to the US. Shell executives have made some very good decisions in recent years; abandoning the American shale sector wasn’t one of them. The main obstacle to a deal? Shell is currently focusing on a business revamp that won’t be completed until mid-2026, so a transaction with BP now would be earlier than the company would wish. The thing about M&A, though is that it happens when it’s possible, not when the time is ideal.

While some are willing to give the board the benefit of the doubt for the next few months, I doubt BP can change direction to their satisfaction. My skepticism is compounded by the board’s selection of Murray Auchincloss, one of the architects of the current strategy, as its chief executive. If the board wanted a U-turn, it should have chosen a different leader in January.

There are other options. BP could try to entice TotalEnergies SE into a merger of equals of sorts, but the idea of a French-British — with emphasis on that particular order of nationalities — oil company seems farfetched. The UK government might not be so keen on a foreign takeover. I also worry that buying BP would burden Total’s balance sheet too much, particularly if oil and gas prices remain at current levels.

In the absence of a European deal, BP might be attractive to US oil giant-in-waiting ConocoPhillips. Conoco has a market value of $135 billion, making it almost double the size of BP. It’s expanding in liquefied natural gas, and BP could turbocharge that business; it would also deliver a fantastic trading business to Conoco, along with production in the Gulf of Mexico, where the US-based company isn’t currently present. But Conoco would have to dispose of way too many other assets, starting with the downstream operations; the company has spent more than a decade focusing entirely on pumping oil and gas, rather than refining it and selling it to costumers.

There’s another US option: tapping Warren Buffett’s riches via a deal with Occidental Petroleum Corp. Adding Occidental’s shale operations to BP’s best assets could work; though, here again, the British government might object to BP relocating to America.

Finally, BP could seek a Middle Eastern strategic investor – the state-owned oil companies of Abu Dhabi and Kuwait come to mind. In the late 1980s the Kuwaitis bought more than a fifth of BP, although later London intervened and forced the Middle Eastern nation to sell a chunk. With that history, a deal may be complicated — but state-controlled firms are keen to expand into trading and LNG. Moreover, if new shareholders force a change of strategic direction, they’ll benefit from any resulting rally in BP shares.

Considering BP’s disastrous performance in recent years, the board should be considering all options. To my mind, putting itself up for sale would be a sensible move — and the sooner the better.

By: Javier Blas, Bloomberg / December 8, 2024