Morning Note: Market news and a positive update from BP.

Market News

US equities edged higher last night – S&P 500 (+0.2%); Nasdaq (+0.5%). Palantir dropped postmarket on concerns about the company’s lofty valuation despite it raising its full-year outlook. Wall Street CEOs including David Solomon and Ted Pick warned investors of an equity market drawdown of more than 10% in the next 12 to 24 months because of “challenging” valuations.

Markets moved lower overnight, with the S&P Futures currently predicting a 1% decline at the open this afternoon.

In Asia this morning, equities were marked down: Nikkei 225 (-1.7%); Hang Seng (-0.8%); Shanghai Composite (-0.4%). The FTSE 100 is currently 0.5% lower at 9,660.

A gauge of the dollar extended gains to a fifth day. Sterling remains weak at $1.3090 and €1.1370. The yen edged higher as Japan’s finance minister issued fresh verbal warnings about the currency. Gold held around the $4,000 an ounce level. Brent Crude declined to $64 a barrel.

Rachel Reeves faces a smaller budget hole than feared, thanks to strong wage growth offsetting productivity downgrades, according to the Resolution Foundation.

Alphabet sold $17.5bn of bonds in the US after issuing €6.5bn of notes in Europe.

Source: Bloomberg

Company News

BP has today released Q3 results which were slightly better than the market forecast, helped by record underlying earnings in the Customers unit and a better refining margin environment. Cash flow was strong and the company has increased its expectation for divestment proceeds for 2025. The quarterly dividend has been increased by 4% and another $750m share buyback has been announced for the current quarter. The shares are little changed in early trading against a weak market backdrop.

Over the last five years, BP has been gradually transforming from an International Oil Company (IOC) to an Integrated Energy Company (IEC). However, performance has been disappointing, and the market has questioned the company’s ability to generate a return on investment at a time when the world was more focused on security of supply and affordability. As a result, the group’s share price performance relative to industry peers has been poor.

Earlier this year, BP announced a reset of its strategy which will involve reducing and reallocating capital expenditure, significantly reducing costs, and driving improved performance in cash flow and returns to support a stronger balance sheet and resilient distributions. Some shareholders would have liked the company to go further and we note a number of recent board changes including Albert Manifold (ex CRH) as Chairman and Simon Henry (ex-Shell CFO) as a non-executive director. In today’s statement, the company has said it is looking to accelerate delivery of its plans, including undertaking a thorough review of its portfolio to drive simplification and targeting further improvements in cost performance and efficiency. 

In the meantime, in the Upstream business (i.e. exploration & production), the company is increasing investment in oil & gas to $10bn p.a. (split 70% oil; 30% gas) and targetting returns of more than 15%. The portfolio will be strengthened, with 10 new major projects expected to start up by the end of 2027, and a further 8-10 by 2030. Production is set to grow to 2.3m-2.5m barrels a day in 2030, albeit it still below the 2019 level. The aim is to generate structural cost reductions of $1.5bn and an additional $2bn of operating cash flow by 2027.

The Downstream division (i.e. refining & marketing) is being high-graded and will focus on advantaged and integrated positions, while a strategic review of Castrol is ongoing. The focus will be on operating performance with a target to consistently improve refining availability to 96%. Capital investment will be $3bn by 2027, with a target of $2bn in cost savings. Overall, the aim is to generate an additional $3.5bn–$4.0bn of operating cash flow in 2027 and returns of more than 15%.

Investment in the group’s ‘transition’ businesses is being slashed from $5bn p.a. to $1.5bn–$2bn p.a., with less than $0.8bn p.a. in low carbon energy. The focus will be on fewer but higher-returning opportunities and more efficient growth. There will be selective investment in biogas and biofuels. In renewables, the focus will be capital-light partnerships, while there will be limited further projects in hydrogen and Carbon Capture & Storage. The group is targeting an annual structural cost reduction of more than $0.5bn in low carbon energy by 2027.

Back to today’s results. In the three months to 30 September 2025, underlying replacement cost profit – the key measure of the group’s performance – fell by 3% to $2.21bn, slightly better than the market forecast of $2.02bn. Compared with the previous quarter, profit was down 6%, reflecting a significantly lower level of refinery turnaround activity, stronger realised refining margins, and higher production, partly offset by a weak oil trading result, seasonal effects of environmental compliance costs, lower realisations and higher other businesses & corporate underlying charge.

By division, the results for the quarter for underlying operating profit were: gas & low carbon energy (-16%); oil production & operations (-22%); and customers & products (up from $381m to $1,716m). Upstream production fell by 0.7% to 2.4bn b/d and is now expected to be broadly flat in the full year.

Cost discipline and operational performance have been strong – in this quarter, upstream plant reliability was 96.8% and refining availability was 96.6%. Around half of the Customers & Products unit’s share of the group’s 2027 structural cost reduction target have now been delivered. Overall unit production costs fell by 3%.

All six of the major oil and gas projects planned for 2025 are online, including four ahead of schedule and 12 exploration discoveries have been made year-to-date, including the Bumerangue exploration well, deepwater offshore Brazil, the company’s largest in 25 years. All at a very early-stage, with no guarantee of a commerciality, the asset could potentially be worth between 5% and 50% of the current share price depending on scale and mix of oil/gas/CO2.

The company is targeting structural cost reductions of $4bn–$5bn by the end of 2027 versus a 2023 base of $22.6bn. Capital expenditure was $3.4bn in Q3 and the group still expects full-year spend of $14.5bn, with organic capital expenditure remaining on track to be below $14bn.

Operating cash flow rose by 13% in Q2 to $7.8bn, reflecting in part a working capital release. By 2027, the aim is to generate compound annual growth in adjusted free cash flow of more than 20% at $70/barrel oil price and returns on average capital employed of more than 16%. Note the oil price is currently $64 a barrel.

The group is targetting $20bn of divestments by 2027, including potential proceeds from Lightsource bp and Castrol. There are no plans for major acquisitions. Expected proceeds from completed or announced disposal agreements have reached around $5bn so far this year. Earlier in the week the company announced an agreement to divest of stakes in US Permian and Eagle Ford assets to Sixth Street for $1.5bn. The company now expects divestment and other proceeds received in 2025 to be above $4bn, versus $3bn-$4bn previously.

During the quarter, net debt was little changed at $26.1bn, despite redemption of $1.2bn of hybrid bond, with gearing of 25.1%. We note, however, the net debt figure doesn’t include $12.5bn of lease liabilities and $8bn of Gulf of Mexico oil spill payables. BP remains committed to maintaining a strong investment grade credit rating and a reduction in net debt to $14bn–$18bn by the end of 2027. This is seen as a more suitable level in a cyclical industry and will drive resilient shareholder distributions of 30%–40% of operating cash flow over time.

Shareholders returns are made by way of a dividend which is expected to increase by at least 4% a year and a share buyback programme. Today, the group has declared a quarterly dividend of 8.32c, 4% higher than last year, implying a full-year yield of 5.6%. The $750m share buyback programme announced with the Q2 results was completed last week. Related to the Q3 results, the company intends to execute another $750m buyback prior to reporting the Q4 results.

Overall, we believe decarbonisation can’t happen at the flick of a switch – oil and gas will remain part of the global energy mix for decades, with demand driven by population growth and higher incomes, particularly in developing countries where the desire for energy intensive goods and services like cars, international travel, and air conditioning is rising. We also believe the production of the materials needed to transition to net zero can’t happen without using hydrocarbons. At the same time, reduced investment in new production, partly because of environmental concerns, and natural decline rates, are increasingly leading to constrained supply.

Against this backdrop, BP is looking to reduce emissions in a way that delivers attractive returns for shareholders at a time of macroeconomic and geopolitical uncertainty. However, investor disillusion with the group’s low carbon strategy, particularly in terms of capital discipline, has had a negative impact on the share price, especially relative to the peer group, leaving them on a very undemanding valuation. This has also attracted the attention of activist investor Elliott Investment Management which now holds a 5% stake and is calling for a more structural transformation. Furthermore, in June there was speculation that Shell was actively considering making an offer for BP. Although Shell issued a denial statement, we believe BP’s current valuation and the presence of Elliot on the shareholder register means M&A speculation is unlikely to die down.

Source: Bloomberg