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Elliott Management, a US-based hedge fund, is exerting pressure on BP to boost its free cash flow by an additional 40 percent through significant cuts to spending. The activist investor has increased its stake in the energy group to over 5 percent and intensified its criticisms of the company.
According to sources familiar with the discussions, Elliott has informed BP that the proposed “fundamental reset” by the company’s chief executive, Murray Auchincloss, in February does not go far enough. Instead, Elliott has presented an alternative plan that urges BP to shift its focus from expanding its oil and gas business to prioritizing a target of $20 billion in annual free cash flow by 2027. This represents a substantial increase from the target outlined in February and more than doubles BP’s “adjusted” free cash flow of $8 billion last year.
A spokesperson for Elliott stated, “Murray has taken 18 months to come up with a three-year plan that’s neither ambitious nor urgent. Time is not on BP’s side here, with the macroeconomic environment and with investor patience running out. The continued underperformance of BP makes it open to a takeover.”
On Tuesday, BP announced that Elliott had raised its stake to just over 5 percent, equivalent to approximately £2.8 billion, placing its shareholding on par with Vanguard, the company’s second-largest investor. Following the unveiling of the new strategy, BP’s shares have declined by around 18 percent, resulting in a reduction of its market value to £57 billion.
Elliott believes that BP can regain a higher valuation by exercising more discipline in its spending. The hedge fund suggests reducing capital expenditure to $12 billion annually, rather than the $13 billion to $15 billion range set out by the company. Additionally, Elliott proposes that BP could achieve $5 billion in cost savings beyond its current target.
Furthermore, Elliott advocates for BP to divest its solar and offshore wind power businesses and identifies opportunities to cut spending across its oil and gas operations. The hedge fund emphasizes the importance of being disciplined in investing within the oil and gas segment, rather than pursuing growth at all costs.
Elliott has raised concerns that BP’s management has not fully addressed the root causes of the company’s issues. They believe that poor execution over the past few years, coupled with escalating costs, has contributed to BP’s underperformance. This perspective contrasts with management’s assertion that the problems stem from “vibes and atmospherics.”
At BP’s recent annual meeting, a quarter of shareholders voted against the re-election of Helge Lund as chair, reflecting investor dissatisfaction with the company’s performance. Examples of BP’s poor capital discipline include overspending on projects like the Tortue LNG project in Senegal and high costs associated with a shale oil joint venture in the US.
BP and Elliott declined to comment on the matter.
As the energy group grapples with mounting pressure from activist investors, the path forward for BP remains uncertain. The company faces tough decisions ahead as it navigates the demands for increased free cash flow and stricter financial discipline.
