BP Faces Break-Up Speculation

BP’s efforts to steady its long-term strategy and restore investor confidence took a hit this week as pressure mounted on the oil major to consider selling or spinning off some of its most valuable assets. With shares down 14 per cent since February and its energy transition plans in retreat, the future of one of the UK's oldest listed companies is again in question.

While Shell has publicly walked away from any takeover pursuit, stating it had “no intention” of tabling a bid, rivals are now eyeing specific units within BP's diverse portfolio. For months, industry insiders have speculated that the 116-year-old company may be worth more broken up than kept whole. Now, that hypothesis is beginning to attract attention beyond the City.

According to sources cited by Bloomberg, Abu Dhabi’s Adnoc and France’s TotalEnergies are among those analysing the group’s key operations, with a view to selectively acquiring businesses that align with their growth plans. Analysts at Bank of America believe the market is undervaluing BP by at least 5 billion dollars compared to the combined worth of its parts.

BP chief executive Murray Auchincloss, who took over in 2023 following the abrupt resignation of Bernard Looney, has so far resisted wholesale changes. He has ringfenced what he views as the group’s core: its deepwater oil assets in the Gulf of Mexico, US shale business BPX, integrated LNG operations, and upstream ventures in Azerbaijan and the Middle East. These divisions, supported by a world-class trading arm, generate a disproportionate share of BP’s earnings.

Even so, the firm’s shrinking equity value and growing restlessness among shareholders, including activist fund Elliott Investment Management, may force his hand. Elliott, which holds a five per cent stake, has publicly urged BP to retreat from renewables and concentrate on high-return fossil fuel operations.

Auchincloss has taken some steps in that direction. In February, he shelved several large-scale wind and solar projects, reversing part of Looney’s net-zero strategy. But this retreat failed to stop the slide in the group’s share price, which now trades at a discount to peers such as Shell, TotalEnergies and Chevron.

As one investment banker put it, “If the oil price stays where it is for the next 12 months, BP is going to be in a desperate state.” Crude oil remains volatile, having briefly spiked above 90 dollars a barrel during the Israel-Iran conflict in April before falling back to around 68 dollars by early August. Weaker Chinese demand and high US inventories continue to weigh on forecasts.

BP has pledged to divest 20 billion dollars in assets by 2027 to reduce debt and fund capital expenditure. The group’s lubricants arm Castrol is already up for sale. Yet many believe this will not be enough.

"Everyone in the market knows BP is a seller," said Josh Stone, an analyst at UBS. "That alone drives opportunistic interest, and it gives potential buyers leverage in any discussion."

Within the industry, five assets are considered the crown jewels of BP’s portfolio. At the top is its position in the US Gulf of Mexico, where the group is increasing daily production towards 400,000 barrels and developing high-pressure fields using cutting-edge technology. Its US shale division, BPX Energy, also holds considerable appeal for North American operators looking to expand in the Haynesville and Eagle Ford basins.

A potential spin-off of BPX as a separately listed entity has been floated by analysts at Enverus and RBC. With strong standalone earnings, minimal integration risk, and clear comparables in the US market, BPX could fetch a premium valuation and allow BP to realise immediate value without a full disposal.

Further east, BP’s upstream partnerships in Azerbaijan and Abu Dhabi are both strategically and financially valuable. The group is the lead operator of the giant Azeri-Chirag-Gunashli oilfield in the Caspian Sea, and also owns a stake in the Shah Deniz gas field. In the UAE, it works closely with Adnoc, which is said to be particularly interested in expanding its LNG capacity and regional influence.

Its LNG operations in Africa, the US and Southeast Asia round out the package. These are increasingly attractive to buyers seeking exposure to the booming global gas trade. With long-term contracts, access to infrastructure and shipping, and a robust trading desk, BP’s gas business could command a high valuation.

However, any major divestment risks undermining the group’s integrated model. Much of BP’s profitability stems not from production alone, but from its ability to control oil and gas from wellhead to pump. Its trading division, which earns more than four billion dollars a year, relies on access to internal volumes and data flows across the value chain.

“The upstream assets are the heart of BP,” said Stone. “Selling those might boost short-term returns but could permanently weaken the group’s earnings engine.”

This complexity partly explains why Shell walked away. Though it would have created a European supermajor to rival ExxonMobil and Chevron, the prospect of integrating overlapping assets and dealing with regulatory hurdles proved too much. Shell is also under pressure from its own investors to simplify and return cash.

Adnoc, TotalEnergies and others are more likely to cherry-pick. Analysts at Bernstein and Goldman Sachs believe a piecemeal sale of BP’s crown jewels, particularly in shale and LNG, would attract stronger interest than an all-encompassing deal.

Still, timing is crucial. Market volatility and oil price uncertainty have dampened M&A appetite. A flurry of deals in 2023, including Exxon’s 60 billion dollar acquisition of Pioneer and Chevron’s purchase of Hess, has slowed. Potential buyers are now more selective and less inclined to take on risk during an unstable period.

Even so, BP may not be able to wait indefinitely. Its clean energy business, though valued at an estimated 14 billion dollars, lacks a clear buyer. While multiple players could combine to carve up renewables assets, analysts are sceptical about whether this would yield maximum value. Many of the group’s clean energy projects remain in early stages or lack long-term returns.

The Castrol sale may provide some immediate capital relief, but the fundamental question remains whether BP can continue as a diversified energy group in its current form. With activist investors circling, rivals examining its prize assets, and share performance lagging, the company may soon have to choose between incremental change and strategic break-up.

If so, Auchincloss will face the same decision many of his peers have already made — whether to go deeper into oil and gas, or step back from it entirely.