Part of being a successful leader of a public company is managing expectations – setting achievable targets which you can tick off and, by doing so, build credibility with the market.

The under-pressure boss of oil and gas outfit BP (BP.) Murray Auchincloss will have been aware he needed to make a splash during a big strategy event on 26 February but telling the Financial Times he wants to get the market value back to its level before the Gulf of Mexico disaster in 2010 – so around $180 billion – by 2030 makes him a hostage to fortune.

Converted into sterling that is around £140 billion, more than double the current market capitalisation of £69 billion. Let’s be more generous, given the dollar has appreciated significantly against the pound in the interim, and assume he means the £119 billion the company traded at in sterling prior to the disaster.

GETTING BACK TO 2010 LEVELS LOOKS TRICKY

To use Auchincloss’ timeframe, if BP was to achieve this within five years, then by 2030 it would have to enjoy a significant re-rating (assuming no meaningful change in earnings) to 15 times from the current nine times forecast EPS (earnings per share).

This would be significantly richer than the levels its market-preferred US rivals are trading on and would be a pretty lofty multiple for any oil and gas company. After all, these businesses have inherently volatile earnings thanks to the underlying volatility of the price of oil and gas. Something over which they have little or no control.

Or, if it was to stay at the same rating, it would have to increase EPS from the $0.60 forecast by the consensus for 2025 to more than $1.03. 

A blend of a more modest re-rating and smaller increase in EPS might just get it there, assuming some impressive execution, but Auchincloss’ big talk means anything less could be dressed up as a disappointment.

CAN BP IMPROVE RETURNS?

The shares actually fell as Auchincloss unveiled his recovery plan which suggests that as a roadmap to achieving the sort of recovery he envisages it fell short.

Most shareholders would probably settle for a simple improvement in the soggy total returns over the last decade, which work out at 4.4% on an annualised basis according to Sharescope. Given you can still get at least 5% from cash in the bank, that provides limited incentive to take on the risks associated with investing in BP.

As expected the strategic reset involved a further dismantling of the energy transition strategy outlined a little more than five years ago by Auchincloss’ predecessor Bernard Looney.

BP will no longer look to shrink its oil and gas production, investments in low-carbon energy will be scaled back and it plans to sell around $20 billion worth of assets by 2027. A strategic review of the Castrol engine oil business and the hunt for a new partner for the Lightsource BP solar power business are top of the agenda. Interestingly, share buybacks were slashed. This may reflect the need to get the balance sheet under control.

Though Berenberg analyst Henry Tarr notes that even if the company manages to reduce borrowings to $14-$15 billion by 2030, as planned, from the current $23 billion its levels of indebtedness would still be higher than its rivals.

The company is also targeting upwards of 20% compound annual growth in adjusted free cash flow out to 2027 and returns on capital employed of more than 16% by 2027.

Reportedly activist investor Elliott, whose presence on the shareholder register emerged earlier this year, is unimpressed with what has been announced – seeing it as lacking in urgency and ambition. It apparently wants BP to trim what it sees as a bloated workforce.

Even with the 5% cuts to employee numbers already outlined by Auchincloss – its resulting roster of 80,000 staff would be higher than ExxonMobil’s (XOM:NYSE) 62,000 and the US company has a market value which dwarfs BP’s.

FOCUS ON CASH FLOW

For Berenberg’s Tarr the key will be delivering on the cash flow target. He says: ‘Free cash flow growth has three key drivers in our view: lower capex, a recovery in the downstream cash flow contribution, and then operating cost reductions.

‘We have high visibility on the capex, but the downstream recovery and cost reductions are harder to forecast given the partial reliance on a recovery in downstream margins. On a medium-term view, BP will either need to drive growth in the upstream or pivot towards growth on a per-share basis rather than for absolute cash flow, in our view.’

The consequences if BP can’t win over the sceptics could be pretty seismic. Elliott is already after more dramatic change. Could this even include splitting up the downstream (refining) and upstream (oil and gas production and exploration) assets?

And if BP’s valuation remains depressed it may be vulnerable to a bid. Shell (SHEL) looks the most likely acquirer for cultural, regulatory and political reasons but whether it would be willing to take on what would be an extremely complex integration process while it is trying to get its own house in order is open to question.

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