In January, BP appointed Murray Auchincloss as its permanent CEO, a decision interpreted by many analysts as a move towards stability following the sudden exit of Bernard Looney.

However, ten months later, the energy giant is perceived as being trapped in a strategic dilemma. Since the beginning of 2023, BP’s stock has underperformed compared to its oil and gas industry peers, widening the valuation disparity for a company that previously distinguished itself by transitioning to more sustainable energy sources.

There is increasing speculation that BP may abandon its ambitious goal set by Looney to cut oil and gas production by 25% by the end of the decade compared to 2019 levels. Last year, the company extracted approximately 2.3 million barrels daily, and this target has already been scaled back from a more ambitious 40% reduction due to a significant rise in commodity prices.

BP has refrained from commenting on ongoing speculation. Nevertheless, Auchincloss has indicated he might be open to revising the proposed cuts. In a statement made in July, he emphasized, “I’m not focused on production volumes; rather, I’m concentrating on cash and earnings, as that’s what truly matters to the market.”

Analysts are expected to question Auchincloss about BP’s commitment to its production goal when the company releases its third-quarter results on Tuesday. Irene Himona, an analyst at Bernstein, noted, “With the stock struggling, this will be an opportunity for them to clarify their strategy.”

Among those urging BP to clarify its future direction is Bluebell Capital, an activist investor with a small, undisclosed stake in the company, which recently reached out to the board. Bluebell criticized what it perceives as an ill-conceived strategy aimed at drastically downsizing BP’s core oil and gas operations.

In a previous interview with The Times, Auchincloss expressed confidence in BP’s trajectory but indicated a desire to create a “simpler, more focused” company. The company still aims to dedicate half of its capital to lower-carbon initiatives by 2030, with approximately 25% allocated in the first half of this year.

Josh Stone, UBS’s head of European energy research, remarked, “We have yet to see any formal update on strategy from the new CEO, which we believe the market is now eager for.”

Auchincloss has taken charge during a period when investor sentiment toward environmental, social, and governance (ESG) criteria has shifted significantly compared to the early pandemic phase when ambitious production cuts were made under Looney’s leadership. Concurrently, rising interest rates and inflation in supply chains have made renewable energy ventures less financially favorable.

His hesitation to steer BP in a new direction could be influenced by his previous role as a key proponent of the green transition alongside Looney. Chris Kuplent from Bank of America noted, “He is caught between the demands from shareholders for more decisive action and the absence of a mandate for such changes.”

Auchincloss has outlined plans to reduce costs by a minimum of $2 billion by the end of 2026 and has instituted a hiring freeze, limiting new external hires to essential roles only.

Additionally, BP has paused bidding on new offshore wind projects to simplify operations and minimize expenses. Current efforts are being channeled into existing initiatives in the UK and Germany, and the company recently sold its ten US onshore wind farms and exited the market.

The company’s previous aggressive acquisitions in solar, green fuels, and biogas have now shifted toward selectively advancing projects that show potential for better returns, which some analysts view as a rational adjustment.

The sequence of BP’s acquisitions and subsequent sell-offs amidst a challenging valuation environment has raised concerns. Kuplent stated, “At the height of the ESG movement, BP was making significant moves into renewables.”

Despite these adjustments, BP’s share price has fallen 13% this year, significantly underperforming Shell and other American rivals. Diminished cash flows from oil trading and refining operations have negatively impacted market perception, as has a higher level of debt relative to competitors.

BP has maintained a target of achieving adjusted earnings between $46 billion and $49 billion next year, an increase from $43.7 billion last year. However, analysts remain skeptical, with a consensus earnings forecast situated at $38.2 billion, compounded by volatile oil prices.

Similar to Shell, Auchincloss has emphasized the company’s commitment to returning capital to shareholders in hopes of narrowing the valuation gap with American counterparts. In February, its payout ratio was raised to 80% of excess cash flow, an adjustment Kuplent described as “already aggressive.”

Analysts are divided regarding BP’s capacity to meet its increased share buyback efforts, which aim for $14 billion over the current and next year. UBS has revised its share buyback prediction to $4 billion for next year, based on a projected decline in oil prices to $75 per barrel, down from an average of $80 this year. The next announcement regarding buybacks is expected in February, coinciding with various market conditions at that time, as stated by BP’s CFO, Kate Thomson.

Strengthening the balance sheet, potentially through further significant asset disposals, is one suggested strategy to secure a more favorable valuation from investors, according to analysts.

Like other major oil companies, BP is grappling with what Kuplent refers to as an “energy trilemma.”

“On one hand, companies must invest in their reserves and future operations. On the other hand, they need to provide adequate returns to shareholders, all while being constrained by their financial capacity. Currently, BP is lacking in most of these areas compared to its rivals.”