Activist Bluebell believes BP is 50% undervalued compared to peers
Company: BP plc
BP provides energy products and services to its customers. The company's segments include gas & low-carbon energy, oil production & operations and customers & products. Its gas business includes upstream activities that produce natural gas, integrated gas and power, and gas trading. Its low-carbon business includes solar, offshore and onshore wind, hydrogen and CCS, power trading, and its share in BP Bunge Bioenergia. Its oil production & operations segment comprises upstream activities that produce crude oil, including Bpx Energy. The customers & products segment comprises its customer-focused businesses, which include convenience and retail fuels, electric vehicle charging, as well as Castrol, aviation and business-to-business and midstream. It also includes its products businesses, refining & oil trading, and bioenergy.
Stock Market Value: $98.5 billion ($34.64)
Activist: Bluebell Capital Partners
Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary:
Bluebell Capital Partners is an activist investor focused on large cap European public equities. The firm, founded in November 2019, is led by founding partners and Co-CIOs Giuseppe Bivona and Marco Taricco. It evolved out of Bluebell Partners, an investment advisory business set up in 2014 by Bivona and Taricco, who together identified shareholder activism – traditionally a predominantly North American phenomenon – as a growing opportunity in Europe.
What's happening:
Bluebell Capital Partners sent a letter to BP Chairman Helge Lund calling on the company to take several actions, including slowing its commitment to reducing oil and gas production by 25% by 2030 compared to 2019 levels, and challenging the company to reduce its investment in its transition businesses (biofuels, convenience, charging, renewables and hydrogen) by 60% between 2023 and 2030.
Behind the scenes:
Bluebell is a passionate environmentalist firm that has a track record as an environmental activist investor. But it is also a financial investing firm and realist that understands the power of capital markets. In this simply astonishing, and potentially watershed, letter to BP, Bluebell states that they believe that the company is worth at least 50% more than the value currently expressed by its stock price and that it trades at a substantial 40% discount to best-in-class peers ExxonMobil and Chevron, "primarily due to an ill-conceived strategy aimed at drastically shrinking BP's core business (oil and gas), on the one hand, and rapidly promoting a risky diversification into sectors with lower targeted returns and where BP has 'no right to win'."
Yes, Bluebell is referring to BP's strategy of aligning its business with the goal set out by the Paris Agreement on Climate Change: net zero emissions by 2050. Bluebell flat out says what many people are thinking – that this is an utterly unrealistic policy that should be declared by governments as unattainable with a more realistic target proposed to replace it.
In the meantime, Bluebell is delivering a wake-up call to BP: end the collective hallucination and realign the company's climate and production targets with reality, or at least with its peers. Bluebell points out that the International Energy Agency ("IEA") has recognized that the pathway to net zero by 2050 is increasingly narrow, admitting that 35% of emissions savings needed by 2050 rely on technology not yet commercially viable or available and pointing out that even available solutions (i.e. nuclear) are being underutilized and decommissioned, calling into question global political will towards such an ambitious goal.
Accordingly, as an environmental activist, Bluebell makes the credible argument that BP's minimization of their core oil and gas production in favor of non-core alternative energy products is unlikely to meaningfully alter the trajectory of the climate crisis. As a financial investor, Bluebell makes the credible argument that this is a losing strategy that harms shareholders.
Bluebell points out that BP's capex spending to diversify away from its core oil and gas services to transition fuels, renewables, and other projects offers lower returns on capital, reduces value generation for shareholders, and positions the business for failure in sectors where the board and management have no real experience or competitive advantage.
According to BP's 2023-2030 plan, the company will allocate just over a third of its $130 billion of capex to businesses such as bioenergy, hydrogen, renewable, EV Charging, etc. These projects are expected to generate between 6-8% unlevered internal rate of return (IRR) for renewables and double digits for hydrogen versus 15-20% for oil and gas. This stands in stark contrast to peers Chevron and Exxon targeting 10% of their capex budget over the next five years.
Moreover, BP's decarbonization strategy, spearheaded in 2020 by former CEO Bernard Looney, is based on a key assumption that is at best questionable and likely false. BP forecasts a 2% cumulative growth demand for oil and gas from 2022-2030. Their peers Shell and ExxonMobil forecast 7% and 6%, respectively; and even the IEA has a significantly larger forecast of 5%. Perhaps recognizing this themselves, BP has already reduced their medium-term targets for reducing oil and gas production, their former goal of -40% established in 2020 was subsequently halved in February 2023 to -20%. Maybe more tellingly, BP shockingly remains committed to its Scope 3 targets of 10-15% reduction by 2025 and 20-30% reduction by 2030. Scope 3 emissions are third party emissions that a company generally has little control over. Not surprisingly, not only has Exxon and Chevron refused to commit to Scope 3 targets, when a shareholder officially proposed such a commitment, it was rejected by 89.5% of the vote at Exxon and 90.4% at Chevron.
In the period from Mr. Looney's appointment as CEO (February 13, 2020) to his resignation (September 12, 2023), BP total shareholder return of 32% lagged all its peers (45% for Shell; 72% for Total Energies, 79% for Chevron and 135% for ExxonMobil). As of Bluebell's October 4, 2023, letter to BP, BP traded on a price-earnings ratio of 6.7 times, a 44% discount to Chevron and ExxonMobil, which on average traded at 12 times. More tellingly, this discount averaged 48% since the new strategy initiated by Mr. Looney, but only averaged 21% in the years 2006 to 2019 and was as small as 15% in the year 2018. To make it even clearer how the market views BP's strategy, on February 7, 2023, when BP announced its partial retracement from this strategy, BP's share price rose 8% on the day and 17% on the week.
Bluebell was prepared to ask for the resignation of CEO Looney in October, but that ended up happening anyway in September. Bluebell now calls on the board to revise its 2023-2030 plan and implement the following six corrective actions: (i) remove its medium-term Scope 3 targets and qualify its 2050 target (Net-Zero) as a target to be reached 'in line with Society'; (ii) realign supply to demand revising upward BP's oil and gas production target, to ~2.5 mmboed by 2030 versus current target of 2.0 mmboed (millions of barrels of oil equivalent per day); (iii) increase investment in oil and gas by ~$1.5 bn p.a. (2023-2030) and reduce cumulative investment in Bioenergy, Hydrogen and Renewables & Power by ~60% (2023-2030), the majority of which will be financed by halting investment in Renewables & Power; (iv) increase cash to be returned to shareholders by a cumulative ~$16bn (~$2.0bn p.a., 2023-2030) to be sure it is better deployed also in support of the energy transition; (v) enhance disclosure on businesses outside core oil and gas (Convenience and EV Charging, Hydrogen) and more broadly on investment hurdles; and (vi) strengthen the Board of Directors, adding the necessary capabilities to oversee large capital deployment in areas which are not BP's core business and have BlackRock's non-independent director Pamela Daley removed from BP's Board.
Bluebell has a long history of environmental activism - agitating Solvay to end its pollution of the Rosignano Beach, urging Glencore to divest its coal unit, and pressuring BlackRock to clarify its ESG strategy due to a risk of greenwashing – which is why a campaign to rollback BPs climate targets may surprise onlookers.
However, Bluebell is what we refer to as an active ESG ("AESG") investor – a qualitative and pragmatic investor who looks to responsibly maximize shareholder value. They believe that achieving net-zero emissions is among the greatest necessities (as well as opportunities) facing this planet. But they fundamentally disagree that it is the role of an oil and gas provider to be a renewables company at the expense of shareholders. Instead, they believe that such a company should concentrate on minimizing or eliminating its own environmental impact (Scope 1 and Scope 2 emissions), meeting demand, and ensuring a smooth energy transition. They are calling on the board to honestly assess what their peers are committed to doing and to be honest about the global reality of decarbonization which even the world's leading climatologists are willing to recognize.
We believe this letter to BP is transformative on many levels. Only an environmental activist with the credibility of Bluebell could publicly voice such an opinion. It shows how the ESG pendulum has swung so far one way and now is swinging back to its rightful position. Moreover, European investors and companies have been well ahead of the United States on ESG matters and the fact that this is happening in Europe is a sign of things to come in the U.S. If it can happen there, it can certainly happen here. But finally, it is a refreshing departure from ESG based on hard rules, quantitative metrics and exclusions. This is a credible environmental activist eschewing those non-qualitative measures. For years, Bluebell has been known for pushing companies further into the ESG waters. It is nice to see that they are also there to take out their lasso and rein a company back in when it wanders too far out.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.