BP is the “ugly duckling” of UK oil majors, according to Thomas Moore, fund manager of Aberdeen Equity Income Trust. But this is exactly the reason why Moore and his team have built a sizeable position in the firm despite the oil giant’s recent operational challenges.
The Aberdeen fund manager discussed his contrarian approach to BP shares in a recent podcast with UK Investor Magazine, highlighting the stark difference in market perception between BP and its larger rival Shell.
“In big oil, the go-to stock for anyone with quality as a key factor in their process would be Shell in the UK,” Moore explains.
Shell’s appeal is evident – it boasts strong cash flows and consistent quarterly delivery that investors prize. The company has established itself as the sector’s quality benchmark.
However, Moore sees opportunity where others see risk. BP, he argues, represents the “ugly duckling” of UK oil majors. Whilst both companies trade on similar price-earnings ratios, this metric masks BP’s true potential for transformation.
Hidden value in operational inefficiency
“BP is so inefficient, and it’s got so much cost it can take out, it can do so much better than it’s been doing over the last three years,” Moore observes.
This inefficiency is seen by Moore as an opportunity to look beyond current performance to the company’s future potential.
The fund manager’s investment thesis centres on where companies will be tomorrow, not where they are today. “You always pay up for that quality,” he notes, referring to premium-rated stocks like Shell. By contrast, BP’s quality characteristics haven’t yet been recognised by the market, creating what Moore sees as a compelling value proposition.
Management under pressure
Moore acknowledges BP’s recent struggles under current management whilst maintaining faith in the company’s underlying assets. “This is a company that’s lost its way,” he admits. “The latest iteration of the management team will do its very best, and we all wish them good luck.”
However, he suggests external pressure may force change if current leadership cannot deliver operational improvements. Takeover speculation has periodically surfaced, including rumours linking Shell as a potential acquirer. “If you’re going to mess up on the operations and fail to deliver, there will be others waiting in the wings,” Moore says.
The possibility of merger and acquisition activity adds another dimension to the investment case, though Moore emphasises this isn’t his primary rationale for holding the stock.
Brazil discovery offers massive potential upside
Moore’s conviction was reinforced in August when BP announced one of its largest discoveries in company history – a significant hydrocarbon find off Brazil’s coast.
The discovery is BP’s largest for 25 years, with analysts suggesting it could be worth tens of billions of pounds.
Early estimates indicate the discovery could be worth as much as a quarter of BP’s entire market capitalisation, though full evaluation of the discovery for commercial potential remains ongoing.
Although Moore didn’t say this directly, his comments suggest that the recent discovery could act as a catalyst for a BP share price rerating in the coming years.
Contrarian value amid market pessimism
Moore’s approach exemplifies contrarian investing principles – finding value in temporarily unfashionable assets. “You just think, does that mean it’s going to go not so well forever? I rather doubt it,” he reflects on BP’s recent performance.
His strategy involves paying “next to nothing in terms of the valuation for one of the UK’s stalwart companies” that has simply hit a rough patch. This long-term perspective contrasts with investors caught up in what he describes as a “frenzy” of constantly upgrading portfolio quality without regard to price.
The Brazil discovery validates Moore’s patient approach, demonstrating how sometimes “good things can happen” when investors look beyond short-term operational difficulties to underlying asset value and long-term potential.
BP shares account for around 4% of the Aberdeen Equity Income Trust portfolio, while 2% is allocated to Shell. The trust has a 6% yield and is one of the few UK equity income trusts that trade at or near a premium to NAV.