Morning Note: Market news and updates from BP and Delta Air Lines.

Market News

President Donald Trump raised trade tensions, hinting at higher tariffs. He told the media he’s eyeing blanket levies of 15% or 20% on most trading partners – EU members will receive letters by today. The President also slapped a 35% tariff on some Canadian goods not covered by USMCA, while keeping a 10% energy levy unchanged. Meanwhile, Luiz Inacio Lula da Silva struck a defiant tone against Trump, saying Brazil can survive without US trade and will seek other trading partners.

Trump said he plans a “major statement” on Russia as the US readies more weapons for Ukraine. He also expects the Senate to pass a tougher Russia sanctions bill.

US equities finished higher last night – S&P 500 (+0.3%); Nasdaq (+0.1%) – setting fresh record closing highs, although the latest tariff headlines have dampened the futures market.

The dollar firmed, while 10-year Treasury yields are currently 4.37%. Gold is trading up at $3,340 an ounce, while Bitcoin extended its record rally, jumping to over $118,000. Brent Crude fell back to $69 a barrel after OPEC trimmed nearer-term demand forecasts.

In Asia this morning, equity markets are mixed: Nikkei 225 (-0.2%); Hang Seng (+0.8%); Shanghai Composite (flat). The FTSE 100 is currently little changed at 8,973, while Sterling trades at $1.3550 and €1.1590. Heathrow Airport plans to invest £10bn over five years to upgrade terminals and increase capacity by 12%, adding 10 million passengers a year.

Source: Bloomberg

Company News

BP has today released a trading statement ahead of its Q2 results scheduled for 5 August. The update provides a brief summary of current expectations for the second quarter of 2025, including data on the commodity price environment as well as group performance during the period. The release points to higher production than expected and strong refining margins. The shares are up 2% 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 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% 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 June 2025, the commodity price backdrop was mixed: Brent crude averaged $67.88/barrel (compared to $75.73/barrel in the previous quarter); US gas Henry Hub averaged $3.44/mmBtu (vs. $3.65/mmBtu); and the refining margin averaged $21.1/barrel (vs. $15.2/barrel). The environment has been volatile as a result of tariff announcements and the bombing of Iran.

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

·       In the gas & low carbon energy segment, price realisations, compared to the prior quarter, are expected to have an impact in the range of -$0.1bn to $-0.3bn, 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 have an impact in the range of -$0.6bn to $-0.8bn, including the production mix effects and the price lags on BP’s production in the Gulf of America and the UAE.

·       In the customers & products segment, the customers segment has benefitted from seasonally higher volumes and stronger fuels margins. The products segment saw stronger realised refining margins in the range of $0.3bn-$0.5bn, with a significantly higher level of turnaround activity. The oil trading result is expected to be strong.

·       The Q2 results are expected to include post-tax adjusting items relating to asset impairments in the range of $0.5bn to $1.5bn, 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 results on 5 August.

As a reminder, the company is targeting structural cost reductions of $4bn–$5bn by the end of 2027 versus a 2023 base. This includes the $750m delivered in 2024. 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 $69 a barrel.

The group is targetting $20bn of divestments by 2027, including $3bn-$4bn this year, weighted to the second half. This includes potential proceeds from Lightsource bp and the strategic review of Castrol. There are no plans for major acquisitions.

In today’s update, the company discloses that net debt at the end of the second quarter is expected to be slightly lower compared to the end of the first quarter ($27.0bn). 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. We note however, the net debt figure doesn’t include $12.5bn of lease liabilities and $8bn of Gulf of Mexico oil spill payables.

Returns are made up of the dividend, which is expected to increase by at least 4% a year, and a share buyback programme. The Q2 dividend will be declared at the time of the results in August – current forecasts imply a full-year yield of around 6%. The $750m share buyback programme announced with the Q1 results is expected to complete this month. Related to the Q2 results, the company is expected to announced 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

Last night Delta Air Lines released reassuring second quarter results and restored its full-year guidance that had been removed at the time of its Q1 results. In response, the shares bounced by 12%, with a positive impact seen across the airline sector and amongst the hoteliers.

Delta is one of the world’s largest global carriers with a fleet of around 1,300 aircraft that are varied in size and capabilities, providing flexibility to adjust aircraft to the network. The group has acquired new and more fuel-efficient aircraft with increased premium seating to replace older aircraft and has reduced fleet complexity with fewer fleet types. In the first half of 2024, the group took delivery of 19 new aircraft and retired 14. With an industry-leading global network, Delta and the Delta Connection carriers offer service to more than 290 destinations on six continents.

During the second quarter, demand trends stabilised at levels that were flat versus last year and the company continued to see resilience in its diverse, high-margin revenue streams. This is in marked contrast to what the company reported three months ago when it said Americans had scaled back travel spending amid falling consumer sentiment over concerns regarding President Trump’s trade policy.

Operating revenue grew by 1% to a record $15.5bn, in line with the market forecast. Capacity grew by 4%, while adjusted total unit revenue (TRASM) was down 3%, in line with expectations.

High-margin revenue streams contributed 59% of total revenue. Premium revenue grew by 5%, cushioning the weakness in main-cabin sales, which were down 5%. Loyalty revenue was up 8%, driven by co-brand spend growth and card acquisitions. American Express remuneration was $2bn, up 10%. Cargo revenue grew 7%. Corporate sales rose in the low single-digits, led by Domestic business. International revenue grew by 2%, with continued restoration of the Transpacific network supporting by double-digit capacity growth in the region.

Adjusted non-fuel unit costs only grew by 2.7%. The company expects the current quarter will be its best non-fuel unit cost performance of the year, with non-fuel unit costs flat to down compared to 2024. Adjusted fuel expense fell by 11% to $2.5bn. The operating margin declined by 150 basis points to 13.2%, while EPS fell by 11% to $2.10, a touch above the market forecast of $2.06.

During the first half of the year, free cash flow came in at $3bn, while net debt fell by $1.7bn to $16.3bn. The group had already announced a 25% increase in its dividend to 18.75c, beginning in the September quarter.

For the full year, guidance for EPS has been reinstated at $5.25-$6.25, versus the current market forecast of $5.39. Free cash flow is expected to be $3bn-$4bn, in line with the group’s long-term target. For the current quarter, the target is revenue growth of 0%-4%, an operating margin of 9%-11%, and EPS of $1.25-$1.75 (vs. consensus of $1.31).

Source: Bloomberg