Morning Note: Market news and an update from BP.

Market News

Markets are fairly steady on expectations President Donald Trump will ease the impact of his auto tariffs, boosting hopes for further dialing down of trade tensions. A gauge of the dollar strengthened 0.2% while gold dropped to $3,315 per ounce. Brent Crude slipped to $64 a barrel.

US equities rose last night – S&P 500 (+0.3%); Nasdaq (+0.1%) – although big tech was mostly lower, with Nvidia weaker on China competition headlines. In Asia this morning, equities were little changed: Nikkei 225 (holiday); Hang Seng (flat); Shanghai Composite (-0.1%).

The FTSE 100 is currently 0.2% lower at 8,413. UK food prices rose the most in more than a year as supermarkets were hit by tax increases and a jump in the national minimum wage. Sterling trades at $1.3415 and €1.1765.

Canada’s Liberals won the election, giving a mandate to Mark Carney after a campaign in which he vowed to stand up to Donald Trump. The Liberals will secure enough seats to try to form a government, but it’s still unclear whether they’ll win a majority, according to major TV network projections.

Spain and Portugal returned to some semblance of normality this morning, with questions remaining about what caused one of Europe’s worst blackouts in years.

Source: Bloomberg

Company News

BP has today released Q1 results which were below market expectations. However, the strategic programme is proceeding to plan, with slightly less capex expected in the full year and slightly more disposals proceeds, both underpinning the group’s 2027 debt reduction target. The company has raised its quarterly dividend by 10% and announced a $750m share buyback in the current quarter, at the lower end of its guidance range. The shares are down 3% in early trading, adding weight to the call by activist investor Elliott Investment Management for a more structural transformation.

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 very poor.

Earlier in the 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 the decision by the Chairman to stand down, albeit most likely during 2026.

In the Upstream business (i.e. exploration & production), the company is increasing investment in oil & gas to $10bn p.a. (split 70/30 oil/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 has been announced. The focus will be on operating performance with a target to consistently improve refining availability to 96% – it was 96.2% in the latest quarter. 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 31 March 2025, underlying replacement cost profit – the key measure of the group’s performance – fell by 49% to $1,381m, below the market forecast of $1,531m. Compared with the previous quarter, the result was up 18%, reflecting lower impact from turnaround activity, stronger realised refining margins, lower other businesses & corporate underlying charge, partly offset by a weak gas marketing and trading result.

By division, the results for the quarter for underlying operating profit were: gas & low carbon energy (+31%); oil production & operations (-9%); and customers & products (-90%). Upstream production fell by 6% to 2.2m b/d and is still expected to be slightly lower in the full year. The group started up three major projects and made six exploration discoveries.

The company is targeting significantly higher structural cost reductions of $4bn–$5bn by the end of 2027 versus a 2023 base. This includes the $750m delivered in 2024. Capital expenditure was $3.6bn in the quarter and the group now expects full-year spend of $14.5bn, slightly below the previous target of $15bn.

Operating cash flow was down 43% in Q1 to $2.8bn, including a working capital build of $3.4bn, reflecting seasonal inventory effects and timing of various payments. 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 $66 a barrel.

The divestment programme has been expanded to $20bn by 2027, including potential proceeds from Lightsource bp and the strategic review of Castrol. There are no plans for major acquisitions. Good progress was made on the programme in Q1, including the review of Castrol, and the intentions to sell mobility & convenience businesses in Austria and the Netherlands and the Gelsenkirchen refinery. The group received $328m of disposal proceeds in Q1 and now expects $3bn-$4bn in the full year.

During the quarter, net debt rose from $23.0bn to $27.0bn, with gearing of 25.7% with the increase due to the cash flow impact highlighted above. The group 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.

Returns will be 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 8c, 10% higher than last year, implying a full-year yield of 6.6%. The $1.75bn share buyback programme announced with the Q4 results was completed on 25 April. Related to the Q1 results, the company intends to execute a $750m buyback prior to reporting the Q2 quarter results. This is at the lower end of the guidance 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 has a 5% stake and is calling for a more structural transformation.

Source: Bloomberg