By Brian Swint

The Gulf of Mexico -- or, as oil executives now call it, the Gulf of America -- is critical to BP CEO Murray Auchincloss's plans to win back investor confidence and fend off a powerful activist in Elliott Management, he told Barron's in an interview in London.

BP has a history in the Gulf -- it's long been a leading producer with cutting-edge wells, and it's also the site of the firm's most devastating event. The 2010 Deepwater Horizon disaster killed 11 workers and ultimately cost some $65 billion.

Fifteen years on, and BP's advantage is that it has already invested some $7 billion from 2022 to 2025 there. Last year, it started the Kaskida project to create its sixth hub in the Gulf. It's now time for the money BP has put in the ground to start paying off. The barrels extracted are highly profitable, and the company's production is expected to reach 400,000 barrels of oil equivalent a day.

Along with other exploration projects in the Middle East, the increased production should supercharge free cash flow. That can then be turned into dividends and buybacks -- and fend off the challenge from Elliott, which has built about a 5% stake in the company, according to reports. Elliott declined to comment.

"We've got top in the sector -- a 20% compound annual cash flow growth rate over the next three years -- and an underpriced share price," Auchincloss said. BP has only given guidance for the next three years, but the CEO expects such strength to continue.

"Well beyond 2027, we see that we can continue to grow at top growth rates in the sector," he added. "That's what will create distributions for shareholders."

Auchincloss is betting that cash can be BP's competitive advantage. Cross-town rival Shell said on March 25 it can lift cash flow by at least 10% a year through 2030 -- about half the rate BP is targeting. Even Exxon and Chevron only got close to 20% free cash flow growth in 2022, the year oil prices spiked after Russia invaded Ukraine.

The question is whether investors are going to buy the pitch. So far, so good -- BP's total returns are up 18% in 2025. Some of that, however, could be attributed merely to Elliott's involvement, as shares jumped 7% the day after the activist's stake was reported. It's still a decent start. In comparison, Shell has gained 16% this year, Exxon 9%, and Chevron 16%.

But there are also hurdles to clear. Auchincloss, who officially became CEO in January 2024, was an architect of BP's 2020 strategy that called for reductions in oil and gas production and more investment in renewable projects that haven't performed. BP has returned just 84% in the past five years, compared with 150% for Shell. Exxon's returns have tripled, and Chevron's have doubled.

To be fair, BP set its strategy five years ago amid predictions that energy demand would rapidly wane, and it was aggressively positioning itself for a market in which low-carbon energy would dominate. That's not how things turned out after the Covid-19 pandemic and the Ukraine war. The political environment is just the latest domino to fall, with President Donald Trump calling for the U.S. to unleash its full energy potential.

"The world has changed," Auchincloss said. "There's not enough wind, not enough solar to provide the baseload power. That's why we changed the strategy, and that's why we're now focused on growing oil and gas."

There's also less of a push from governments toward renewables, and a greater emphasis on energy security.

"You have to follow the nations in which you operate, you have to follow what the presidents and prime ministers want you to do on their behalf," he said.

Investors argue that the problem isn't necessarily BP's direction per se under the old strategy. At some point, demand for fossil fuels will start falling, and all the oil majors will have to figure out how to remain viable in the long term.

The company's relative weakness over the past few years may come down more to too many poorly performing investments. Pinning the strategy shift on changing circumstances might not wash with shareholders.

BP's underperformance has opened the door to speculation that it might become an acquisition target. However, Auchincloss dismissed suggestions that BP might be forced to merge with a rival such as Shell.

But Elliott, the hedge fund run by Paul Singer, has a record of shaking things up. Aside from BP, it's pushing for board changes at Phillips 66, the U.S. refiner. It has also taken stakes in Canadian oil sands producer Suncor Energy and U.K.-listed miner Anglo American. In the past, it has run campaigns at Marathon Petroleum and Hess.

Elliott, which hasn't made public any demands for BP, may seek changes to the board and management team, Reuters reported last week, citing unidentified people who have discussed the plans. Another potential ask could be for spending to be further reduced and for additional asset sales.

BP's Annual General Meeting is coming up on April 17. That could be a key date for Auchincloss to shore up support, and for Elliott to make its next move.

Write to Brian Swint at brian.swint@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 28, 2025 01:00 ET (05:00 GMT)

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