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Activist investors generally start with a straightforward concept: identify a struggling company, often burdened with debt. They aim to streamline its operations, refine the business to a healthier state, and subsequently reap substantial financial rewards. This accurately embodies Elliott’s investment approach towards the troubled oil giant, BP. However, sometimes unexpected challenges arise.
On Tuesday, BP announced earnings that were 50% lower than those from the previous year. This decline wasn’t due to fluctuating oil prices, which were $65 a barrel on that day—down from approximately $80 on average in 2024. Instead, the company faced reduced profits from gas trading.
Nonetheless, oil prices are still significant. A general guideline suggests that BP loses $340 million in yearly operating profit for every dollar decrease in oil prices. If Tuesday’s price were to average throughout the year, it could result in a $5 billion reduction from last year’s underlying operating profit of nearly $21 billion. BP’s shares have plummeted by 25% since February, when Elliott began buying shares.
Admittedly, BP isn’t the only oil company facing the impact of declining oil prices. Elliott has partially mitigated the broader market risk by shorting shares of competitors Shell and TotalEnergies.
However, Elliott, or any other investor, still has to confront certain specific risks. For one, BP has significant debt—$27 billion at the close of the first quarter, net of cash—though this amount has been temporarily inflated by certain factors. Including hybrid bonds, Citigroup estimates the total debt to be around $44 billion, which is over double last year’s cash flow. This makes BP particularly vulnerable to fluctuations in oil prices.
The second concern is that BP’s recovery somewhat relies on the global market remaining stable. Much of its projected value generation hinges on selling approximately $20 billion in assets by 2027. BP has initiated this process, securing $1.5 billion in agreements this year. However, inconsistent tariff policies have dampened interest in mergers and acquisitions, potentially hindering BP from achieving optimal pricing for its assets.
Additionally, BP is attempting to refocus on oil and gas after exploring renewables, but its high debt levels limit its speed. A strained balance sheet restricts the company’s ability to acquire smaller oil and gas firms needed to replenish its reserves, which fell 13% between 2022 and 2024.
Despite the challenges, BP’s CEO, Murray Auchincloss, isn’t powerless. He has reduced investments and aims to implement further cuts. Elliott, on the other hand, urges him to be even more aggressive—an easier task in challenging circumstances. The further oil prices decline, the more effort BP will need to invest to recover successfully.
camilla.palladino@ft.com
