Billionaire investor and head of Berkshire Hathaway Warren Buffett recently piled into oil shares, just as BP (LSE: BP.) has been hitting the headlines.
News emerged that Elliott Management has built up a stake in BP worth close to £3.8bn. The hedge fund is urging the company to offload some of its green energy goals and return its focus to high-profit oil and gas. Did somebody say “Drill, baby, drill“?
Warren Buffett might not be such an open activist. But he’s just put another $409m of Berkshire money into Occidental Petroleum. Berkshire now owns a whopping 28% of the $45bn oil giant. If he invested in the UK stock market, I can’t help thinking he might be eyeing up BP’s valuation today.
Falling profits
The BP share price has jumped 6.5% since the Elliott Management news broke. But a 61% fall in fourth-quarter profits reported on 11 February might not exactly make it look like a screaming oil buy.
For the 2024 full year, rival Shell posted revenue of $284bn while BP hit $189bn. That puts Shell 50% ahead on the revenue front, yet its market capitalisation is more than double BP’s. And Shell’s adjusted EBITDA for 2024 came in 73% ahead of BP’s.
That’s based on a single snapshot in a volatile market at a time of economic change. But on this, admittedly simplistic, basis it doesn’t look like BP has done as well for its shareholders as Shell.
A person claiming to be familiar with Elliott has said that analysts believe BP is currently destroying value.
Cheap oil
We’re looking at a forecast price-to-earnings (P/E) ratio for BP of 10 for 2025, with analysts expecting it to dip to around 8.4 in 2026. Shell is on similar forward valuations, of nine dropping to around 8.1. With decent dividend yields, those could be tempting valuations. I think the outlook might favour Shell right now, but a bit of fresh activism could change that.
One observer, MarketScreener, even thinks Elliott might have a merger between BP and Shell in mind. It’s a sector with no competitive advantages between product offerings — oil is oil, gas is gas. It’s possibly the industry in which consolidation makes the most sense.
If we’re talking of potentially cheap oil stocks, we can’t ignore the stuff itself. And that’s a possible downside, as President Trump’s hopes of getting the oil taps gushing could send the price of a barrel down. It’s currently a bit over $70, and has been falling so far in 2025.
Investor considerations
The Elliott interest could get BP on a more profitable footing in the short term. And though it can be a politics-driven industry, a single presidency might not mean much in the decades ahead. Whatever we might think about the current US administration’s take on unfettering the oil business, it’s Trump’s final turn at the wheel.
The Warren Buffett approach has to be all about the long-term future of oil, and he’s bullish. I’m less certain and a lot less knowledgable, so I’ll sit it out and just enjoy watching.
