“Dear Mr Sawan,
“8 July 2025
“RE: BP (LSE:BP.) SHARES
“I’m writing in response to Shell’s press release of 26 June, which stated that your company’s not ‘actively considering’ purchasing BP, its FTSE 100 rival. As your statement acknowledges, this precludes making an offer for a period of six months. However, this may change with BP’s agreement or if there’s a ‘material change in circumstances’, but for now at least, it’s clear to me that a takeover isn’t on the cards.
“However, I think there are a number of reasons why you could consider revisiting your decision.
“Reduced valuation
“First, the recent fall in the oil price — and its impact on BP’s valuation – means, in my opinion, there’s an opportunity to acquire a bit of a bargain.
“As recently as February 2023, the group had a market cap of over $120bn. Today, despite the business being fundamentally the same as it was 28 months ago, it’s valued at approximately $82bn. To remind you, at 31 March, BP had a book value of $78bn. This implies a price-to-book ratio of 1.05, compared to Shell’s 1.16.
“If you were interested in buying, I’m sure you would have to pay a premium to its current stock market valuation. Even so, the purchase price is likely to be lower than you would have needed to pay when energy prices were much higher.
“A sleeping giant
“If you did acquire the company, I’m optimistic that you could implement some operational efficiencies. BP employs more people than Shell yet its revenue and earnings are much smaller. This could explain why your share price has done much better over the past 12 months. With a different approach and mindset, I think there’s a big opportunity to improve BP’s earnings.
“According to Reuters, your rivals’ production, manufacturing and distribution expenses soared from $33bn in 2019 to $43bn in 2024. Over the same period, operating costs as a proportion of EBITDA (earnings before interest, tax, depreciation and amortisation) went from 70% to 113%. By contrast, Shell saw a $1bn drop in its operating expenses. They also fell as a proportion of earnings.
“If BP could become as efficient as Shell, its free cash flow (FCF) would improve enormously. I understand one of the company’s biggest shareholders, Elliott Investment Management, is targeting FCF of $20bn by 2027 (it was around $8bn in 2024). If realised, anyone buying BP could quickly recoup the purchase price.
“Potential risks
“Of course, having joined Shell as an engineer in 1997 you’re fully aware of the particular challenges that the sector faces. Oil and gas prices are notoriously volatile, which makes earnings unreliable.
“And the Deepwater Horizon tragedy of April 2010 is a reminder of how devastating the consequences can be when things go wrong.
“Although there’s an unstoppable move away from hydrocarbons, demand’s still rising. And even when the world reaches peak consumption, most economists are predicting a gradual decline thereafter.
“I’m aware that you previously told the Financial Times that you’d prefer to buy your company’s own stock rather than that of your FTSE 100 rival. However, given the group’s current depressed valuation — and untapped potential that could be realised by implementing some operational efficiencies — you could consider buying BP’s shares instead.
“Yours sincerely,
“James Beard”
