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It has been a long time since we wrote about BP PLC (NYSE:BP). In fact, our only article on the company came about 5 years back.
Seeking Alpha
The stock's total returns since then have not been too bad. We have been able to accentuate those with multiple covered call trades which have worked well as BP stock price (not total returns), have stayed in a modest range. But if you zoom out a bit, you can see the frustration of the shareholders. These are the returns over the last 2 decades.
Equally, importantly, BP has really lagged its US and European peers including TotalEnergies SE (TTE), Shell PLC (NYSE:SHEL), Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and ConocoPhillips (COP).
These are not tiny differences either. Sometimes valuation compression can account for a large portion of total return differences. We can see that here to some extent as BP trades cheaper on multiple metrics compared to the other five.
Nonetheless, the difference with its European peers is fairly minor, and we would attribute the bulk of the poor return profile to BP's confused strategy.
The Confused Strategy
Around the time of our last article, BP gave up on its oil and gas business and went "all-in" on renewables.
Bernard Looney, BP pledged in 2020 to cut oil and gas output by 40% while rapidly growing renewables by 2030. BP lowered the reduction target to 25% in 2023.
Source: Reuters
In other words, sell all the high return on investment (ROI) assets and invest in the poorest return assets. Well, second poorest, they did not go after mortgage REITs, so they had that going for them, which is nice. While renewable asset investing was the general theme across all energy firms, the remaining 5 did not make such drastic turns. Where they did favor lower carbon assets, it was an emphasis on natural gas and LNG plays. BP's lack of focus was visible in its numbers. The company that produced 3.7 million barrels of oil equivalent in 2018 was down to this in Q1 2025.
BP Q1 2025 Presentation
Eventually, everyone noticed that BP had no real path to becoming a lean, mean, green machine and we got a full reversal once again.
BP Presentation
Will SHEL Put BP Out Of Its Misery?
SHEL has had problems of its own over the years, including the major reserves scandal. But they have put the past in the past and focused on a very high shareholder return strategy. The new CEO is focused on getting valuations back up to match its US peers and to that end, has trimmed capex ideas and reduced expenditures in the power sector.
Moving on to shareholder distributions, today we have announced a $3.5 billion share buyback program, which we expect to complete by the time of our Q2 results announcement. This makes it the 14 consecutive quarter in which we have announced $3 billion or more in buybacks. With this new $3.5 billion share buyback program we are well within our enhanced shareholder distribution range of 40% to 50% of CFFO, a range that you can expect us to deliver on through the cycle given our low distribution breakevens, $40 Brent for dividends, and buybacks continuing at $50.
Source: Q1 2025 Transcript-SHEL
The actually have the balance sheet strength to continue this, but of course, oil prices will be the ultimate decision maker on what gets executed.
Still, based on what we have seen over the past 5 years, it is hard to own BP over SHEL from a "buy and hold" perspective. We have traded BP, mainly from the covered call side simply as the dividends plus call premiums have created enough of a windfall to stay engaged. If we had to go with a "buy and hold", BP would not be in our top 10 choices for the energy sector. The investor though, has to adapt to what happens in the market and last evening, we were treated to this headline.
Shell is exploring the possibility of acquiring its competitor BP, expecting a fall in oil prices and the shares of the competitor. This was reported by Bloomberg, reports UNN.
Over the year, BP's shares lost a third of their value, due to investor dissatisfaction and falling oil prices. At the same time, BP's shares continue to fall. The final decision will probably depend on further BP quotes.
Shell is also considering alternative scenarios. For example, they may focus on buying back their own shares or smaller acquisitions. According to a Shell representative, the company is focused on increasing efficiency, discipline and simplifying the structure.
At the same time, BP did not comment on the situation.
Source: UNN
Our thoughts here are that BP is ripe for the taking. They have gone all over the place and their weakened position makes the shareholders ready to revolt. SHEL has a higher valuation that BP, so to some extent, using its shares to buy BP would make sense. At the same time, SHEL is not going to be able to pay a huge premium. Huge equity premiums are easy to pay for debt laden companies. When debt makes up the bulk of the enterprise value, tagging an extra 50% on the equity is nothing in the grand scheme of things. But for all its faults, BP still has an A rated balance sheet and debt is modest in relation to enterprise value and pre-capex cash flow. Still, we can see SHEL paying as high as $35.00, even in the current climate. The end result should be good for both parties and BP name can be retired off the sheets. We have the October 2025 $29 covered calls in place for BP and those offer the best setup for us at this time. We rate BP a Buy at this point.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints. Most of our articles are not written for "buy and hold" investors. Our articles are not written for investors who ignore capital preservation while focusing only on yield.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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