Morning Note: Market news and an update from BP.

Market News

Geopolitical tensions remain elevated as China imposed curbs on five US units of Hanwha Ocean in response to measures taken against its shipping industry. The country is looking into the impact from the USTR’s investigation into its maritime sector and may take more retaliatory action. Meanwhile, Scott Bessent told the FT that Beijing was trying to hurt the global economy with its controls on rare earths and critical minerals.

The debasement trade is rippling through global markets as investors shun sovereign debt and currencies, seeking protection from runaway budget deficits. The gold price hit a record high of $4,180 an ounce hit earlier in the session, although it has slipped back and currently trades at $4,120. SocGen raised its price target for bullion to $5,000 by the end of 2026. 10-year Treasury yields crept down towards the 4% level.

US equities rose last night – S&P 500 (+1.6%); Nasdaq (+2.2%) – although the futures market is currently pointing to a retreat at the open this afternoon. Wall Street bank earnings kick off with JPMorgan, Goldman, Citi, and Wells Fargo reporting pre-market. JPMorgan and Goldman may cement their trading and deal-fee leads, Bloomberg Intelligence said.

Japan’s main opposition parties will meet today as they consider uniting behind Yuichiro Tamaki to challenge ruling party leader Sanae Takaichi for the premiership. In Asia this morning, equity markets were weak: Nikkei 225 (-2.6%); Hang Seng (-1.8%); Shanghai Composite (-0.6%). Samsung fell despite posting a jump in quarterly profit as investors hoping for outsized numbers cashed out on recent gains.

The FTSE 100 is currently 0.3% lower at 9,405. Sterling slipped to $1.3375 and €1.1475 as UK wage inflation excluding bonuses rose less than expected: 4.7% in the three months to August. Retail sales grew at a slower pace in September as warm weather delayed purchases, the BRC said.

Source: Bloomberg

Company News

BP has today released a trading statement ahead of its Q3 results scheduled for 4 November. The update provides a brief summary of current expectations for the third quarter of 2025, including data on the commodity price environment as well as group performance during the period. The release points to high than expected upstream production and a weak oil trading result. The shares are down 1% in early trading.

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. The changes should help to accelerate the delivery of the company’s reset strategy but there is currently no intention to go further.

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 update. In the three months to 30 September 2025, the commodity price backdrop was mixed: Brent crude averaged $69.13/barrel (compared to $67.88/barrel in the previous quarter); US gas Henry Hub averaged $3.07/mmBtu (vs. $3.44/mmBtu); and the refining margin averaged $15.8/barrel (vs. $11.9/barrel). The environment has been volatile as a result of ongoing geopolitical uncertainty.

·       Upstream production is now expected to be higher compared to the prior quarter, with production higher in both oil production & operations, primarily higher gas production in bpx energy, and in gas & low carbon energy. This compares to previous guidance for slightly lower production.

·       In the gas & low carbon energy segment, price realisations, compared to the prior quarter, are expected to have an impact of around -$0.1bn, including changes in non-Henry Hub natural gas marker prices. The gas marketing and trading result is expected to be average. 

·       In the oil production & operations segment, price realisations, compared to the prior quarter, are expected to be broadly flat, including the impact of the price lags on production in the Gulf of Mexico and the UAE. Compared to the prior quarter, exploration write-offs are expected to be around -$0.1bn higher.

·       In the customers & products segment, the customers segment has benefitted from seasonally higher volumes and broadly flat fuels margins. The products segment saw stronger realised refining margins in the range of $0.3bn-$0.4bn, with a significantly lower level of turnaround activity. The oil trading result is expected to be weak.

·       The Q3 results are expected to include post-tax adjusting items relating to asset impairments in the range of $0.2bn to $0.5bn, attributable across the segments. These items are treated as adjusting items and excluded from underlying replacement cost profit.

Further detail on operating cash flow, net debt, and shareholder distributions will be provided with the Q3 results on 4 November.

As a reminder, the company is targeting significantly higher structural cost reductions of $4bn–$5bn by the end of 2027 versus a 2023 base of $22.6bn. In the first half of 2025, $0.9bn of savings were delivered, amounting to $1.7bn so far. Capital expenditure for the full year is expected to be around $14.5bn.

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 $62 a barrel.

The group is targetting $20bn of divestments by 2027, including $3bn-$4bn this year. Expected proceeds from completed or announced divestments had reached around $3bn at the half-year stage. This includes potential proceeds from Lightsource bp and Castrol. There are no plans for major acquisitions.

In today’s update, the company discloses that net debt at the end of Q3 is expected to be broadly flat compared to the end of Q2 at around $26bn including the impact of the redemption of $1.2bn perpetual hybrid bonds on 1 September as planned, higher income taxes paid of around $1bn and a working capital release. 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. The Q3 dividend will be declared at the time of the results in November – current forecasts imply a full-year yield of around 6%. The $750m share buyback programme announced with the Q2 results is expected to complete this month. Related to the Q3 results, the company is expected to announce another programme in the range of $750m-$1.0bn.

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