6 hours ago
8
The clearing of the decks continues apace at BP. The last chief executive, Murray Auchincloss, got the heave-ho in December. Last month brought news of hefty write-downs on the troublesome low-carbon energy assets in solar and biogas. Now comes an admission that the current debt-reduction measures aren’t enough to ease the strain on an over-extended balance sheet. Share buy-backs are being suspended.
Buy-backs have become the essential symbol of financial virility in today’s oil industry. At the right price, they represent an efficient use of excess capital and are a way for managements to send obligatory signals about “financial discipline”, meaning refraining from empire-building adventures.
Thus it was significant that Shell last week sustained its 17th consecutive quarter of at least $3bn of buy-backs, allowing debt to rise even as profits fell. The company was saying it can handle, for now, a spell of lower oil and gas prices. At BP, by contrast, buy-backs are already deemed an unaffordable luxury.
The decision is probably sensible in the short-term for three reasons. First, BP’s balance sheet, measured by financial gearing, is the weakest among the big oil majors. Debt, on the most generous metric, is $22bn. So best to save $6bn a year by “fully allocating” excess cash to the reduction effort. It is simpler than waiting for receipts from disposals, notably the 65% share of Castrol, to arrive.
Second, there is little relief in sight from markets: annual profits for 2025 were $7.5bn, down from $9bn, reflecting a 20% drop in the price of oil. Third, the new chief executive, Meg O’Neill, will arrive in April, so let her start with a free hand.
The market didn’t like the decision – especially the refusal to commit to restarting buy-backs once debt is within the target range of $14bn to $18bn – but it cannot be surprised. Shares fell 6%.
But it does all add to the mystery over what the reign of O’Neill and new-ish chair, Albert Manifold, will bring. The only certainty is more oil and gas projects. BP started seven in the past year and has its large Bumerangue discovery 250 miles off the coast of Brazil in the wings. So it is conceivable that BP, having signalled chunky cuts in fossil fuel production during the green-tinged era of Bernard Looney, will veer to the opposite extreme of keeping output at roughly the current level of 2.3bn barrels a day all the way until 2035. The talk now is about the “deep hopper of oil and gas opportunities”.
One constituency of shareholders – those who hated the dabbling in renewables and thought BP should stick to what it knows – will applaud the new direction. But one suspects even they will want clarity sharp-ish from O’Neill on what else follows.
If BP is now all-in on oil and gas, is there any point in keeping a rump interest in solar and biogas? Could those assets be sold? And perhaps the electric vehicle charging assets and the global chain of petrol stations could be added to the mix, which might create a bigger and cleaner parcel for a demerger.
Most of all, though, investors will want to know what’s coming their way in terms of cash, after the churn of capital expenditure, cost-cutting and disposals. It’s one thing to “retire” – as BP did on Tuesday – guidance that 30-40% of operating cashflow will go to shareholders in the form of dividends or share buy-backs. But something has to be put in its place.
How low does debt have to go before the balance sheet is judged safe? What oil price is required to allow share purchases to resume? BP shareholders, whatever strategic camp they’re in, love the hard clarity of dividends and buy-backs. O’Neill’s honeymoon period won’t last long.
