Is BP going to be this year’s mega-merger?

This content is marketing material. This article is not investment advice, capital is at risk.

Neil Wilson,  UK Investor Strategist

Key points

• BP shares surged after activist investor Elliott Management went public with its stake
• Hedge fund was first reported to have built stake in January, fuelling a rally in the stock
• Activist is seen driving strategy reset announced in February to prioritise fossil fuels, scrapping green ambitions and boosting cash returns
• Takeover rumours have started to swirl, with Shell (SHEL), Exxon Mobil (XOM) and Chevron (CVX) touted as suitors

BP stock rallied sharply on Wednesday after hedge fund Elliott Management declared a stake of more than 5% in the oil major. The activist investor, which was first reported to have built a sizeable stake in BP in January, is likely behind the company’s recent strategy reset announced at its capital markets day in February, and could push for further changes, which may or may not include a takeover.

Before Elliott’s stake was reported in January BP was already under pressure to increase returns to shareholders as its share price lagged peers such as Shell. BP has been underperforming peers since 2020, coincidentally or not corresponding with the company’s push to be “net zero by 2050”. In the last five years, Shell shares have risen 77% against the 17% rise for BP.

This prompted a strategy reset earlier this year that scales back green emissions targets and increases investment in oil & gas production, whilst also upping shareholder returns.

However, it’s thought Elliott wants to push BP to do more, pressing for free cash flow to be increased to $20bn by 2027, from $8bn last year. That would imply about $6bn in extra savings and divestments from BP’s current plans to increase FCF by 20% a year to $14bn. According to sources cited by the Financial Times, Ellott wants BP to cut its spending to roughly $12 billion a year, down from a current $13 billion-$15 billion range.

Takeover in the Pipeline?

BP has been periodically tipped as a takeover target, but nothing has transpired. A year ago Abu Dhabi National Oil Company (ADNOC) was reportedly looking at buying BP, but decided against pursuing a takeover.

But news of Elliott’s stake has reignited rumours about a possible deal.

With pressure from investors, a takeover is not out of the question, even if it appears unlikely at present. But then again there was even talk of a Chevron-Exxon deal at the height of the pandemic when oil prices briefly turned negative.

We’re not quite in that position today with tariffs and macro uncertainty, but the energy sector is, in terms of fossil fuels, facing a major conundrum. Some have called it an ‘existential crisis’ as it seeks to remain relevant and keep returning cash to shareholders.

Against this backdrop there seems to be a lot of chatter about BP, which has lagged peers, becoming subject to a takeover. And with BP a primarily US-focused business, deriving about 40% of FCF from the country, there is a sense that a transatlantic merger is an option. BP arguably trades at a discount to peers, but arguably also due to its London listing, which could make a transatlantic move an option to unlock value.

A takeout of BP, or a merger with Shell, would be major, for sure. But we have seen some megadeals in the energy sector lately. Exxon Mobil completed its $60 billion purchase of Pioneer Natural Resources in May last year, a move to become the biggest player in the Permian basin in the US, while Chevron is progressing on its $53 billion Hess (HES) deal.

BP is due to report first-quarter 2025 results on Tuesday, 29 April, with analysts expecting lower reported upstream production and net debt $4bn higher in the first quarter than in the final three months of 2024.

For Q4 2024, BP reported an underlying replacement cost profit of $1.17bn, down sharply from the $2.27bn it reported in the third quarter. The underlying replacement cost profit is BP's preferred metric for net income. While upstream is seen falling, the downstream business is also pressured. Oil majors like BP have seen refining margins squeezed, partly due to a rise in refiners in Africa and Asia, while crude prices have materially declined since peaking three years ago.

Stock Analysis

The analyst consensus on BP is Overweight, based on 30 analysts tracked by FactSet, with the average price target implying 20% upside to current levels. The Dividend Yield is above 6% currently.