BP's Bumpy Ride: Navigating Management Changes, Profit Shortfalls, and the Turbulent Landscape of the Oil and Gas Sector

BP

Here the company has been hit by management upheaval as first CEO Bernard Looney departed after failing to disclose details of past relationships with colleagues, and was then followed out the door by the head of BP's US operation Dave Lawler also resigned. Nonetheless the uncertainty at the top of the UK's second biggest oil company helps to explain why BP's share price has underperformed relative to Shell in the last this year, however it doesn't explain why it has underperformed year to date.

That's down to management and it rather begs the question as to whether any new CEO will persevere with the "Performing while Transforming" of Bernard Looney, because while it is clear that BP is transforming, it certainly isn't performing, after missing on Q3 profits.

When BP reported in Q2 the numbers were clearly expected to come in short of expectations, and while the bar was low, they still somehow failed to clear it. The Q3 numbers followed the same playbook with underlying replacement cost profit coming in at $3.3bn, falling well short of expectations of $4.05bn. The underperformance appears to have come from its gas and low carbon energy division where profits were lower compared to Q2 at $1.25bn, while oil production and operations saw an increase from Q2, coming in at $3.13bn, although both numbers were sharply lower from the levels last year due to lower oil and gas prices.

One of the reasons for the sizeable drop in profits in the gas and low carbon energy division is the decision to take a $540m charge in respect of its joint share with Equinor in a US offshore wind farm off the coast of New York.
In a carbon copy of Q2 BP took the decision to try and sweeten the disappointment by announcing another $1.5bn buyback, while announcing a dividend of 7.27c a share.
Despite the disappointment the headline numbers are an improvement on Q2 and appear to be in line with the misses seen from its US peers Chevron and Exxon, however these two US oil majors are magnitudes of size bigger so the bar for them is higher.

Reported oil production levels are also higher from the same quarter a year ago, up by 5%. On the plus side BP has managed to cut the level of its debt by $1.3bn to $22.3bn, however this only partially reverses the decision to increase it in Q2 by $2bn to fund an increase in the dividend and announce another buyback.

For Q4 BP said it expects upstream production to be broadly flat compared to Q3, while also saying it expects to see lower volumes as well as pressure on refining margins. While the likes of BP and Shell have managed to hold up reasonably well this year the same cannot be said for the smaller UK oil and gas giants who have seen their profits wiped out by the UK government's misguided 35% windfall tax which has to all intents and purposes killed investment in the North Sea basin and surrounding region.

Harbour, Serica, and EnQuest share price year to date

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To illustrate this point perfectly, back in August Harbour Energy announced that H1 revenues came in at just over $2bn, down from $2.67bn a year ago on the back of lower oil and gas prices. Profit before tax fell from $1.49bn last year to $429m this year, though after tax of $437m, this translated into a H1 net loss of -$8m, compared to a $984m profit last year.

Of the revenues $1.11bn came from crude oil, and gas of $759m, with the bulk of sales coming from its North Sea operations. International revenue accounted for a mere $98.1m in sales.
The company announced an interim dividend of $100m or 12c a share, while saying that they expected to reach zero net debt by the middle of next fiscal year.
This is a significant achievement given that at the time of the Premier Oil and Chrysaor merger the company was carrying net debt of $2.9bn.

Due to the windfall tax CEO Linda Cook said that the review of their UK operations had delivered annual savings of $50m from 2024, with Harbour growing its share of UK domestic oil and gas to 15%.
The company also announced an interim dividend of $100m or 12c a share, while saying that they expected to reach zero net debt by the middle of next fiscal year, a notable achievement given that at the time of the Premier Oil and Chrysaor merger, the company was carrying net debt of $2.9bn.

Due to the windfall tax CEO Linda Cook said that the review of their UK operations had delivered annual savings of $50m from 2024, with Harbour growing its share of UK domestic oil and gas to 15%. Harbour also announced they would be reducing annual capex to $1bn as well as guiding production guidance lower to 195kboepd.
During the summer the UK government tried to throw a bone to the sector by saying the windfall tax would cease to apply if average prices for oil and gas fell to, or below $71.40 a barrel, and £0.54p a therm for 2 consecutive quarters, the tax measure would cease to apply and revert to 40%.

While the UK government has announced it will be offering hundreds of new licences for oil and gas production uptake with 27 approved in October most of these are unlikely to come on stream quickly.
As we look ahead to 2024 the likes of BP and Shell can certainly be criticised for a lack of investment towards renewables and incentivising buybacks over future capex, but oil companies will only invest large amounts of capital or sunk costs if they have an expectation of a decent return, and a stable investment environment.
Currently we have neither of these, and in the case of renewables there is little in the way of profit to be made to justify the large capital outlay, which is why a recent government offshore wind auction didn't attract any bids, due to a low strike price.

When that maximum strike price was raised from £44MWh to £73MWh for offshore, and from £116MWh to £176MWh for floating offshore wind the auctions attracted great interest.
The economics of renewables appears to be something that eludes the imagination of a lot of people, not only in politics, but also in the general population.

Until that changes it will be extremely difficult if not impossible to be able to implement the sort of changes required in the timeframe that is required.
Even the more established players in the renewables sector are struggling to turn a profit when it comes to wind and solar power.

Denmark's Orsted for example is one of the world's biggest providers of renewable energy of offshore wind, with an excess of 13.7GW of installed capacity, with 6.2GW of that installed in the UK.
This total is expected to increase to 50GW by 2030, by a combination of wind, solar and renewable hydrogen, which last year was estimated to cost in the region $54bn. Since then, the prices of key commodities have soared, along with demand. This inconvenient fact continues to be overlooked by climate activists as they continue to peddle the fiction that renewable power is cheaper.

The reality is that oil and gas is likely to be around for some time to come in the absence of a reliable base load alternative which can compensate for dunkelflaute periods of low light and no wind which occurs on average between 50-100 hours a month between November and January.