Morning Note: Market news and an update from BP.
Market News
US equity markets moved higher last night – S&P 500 (+0.1% to set its 35th all-time high for this year), Nasdaq (+0.3%) – as did markets in Asia this morning – Nikkei 225 (+2.0% to a record high); Hang Seng (+0.1%); Shanghai Composite (+1.3%). The FTSE 100 is currently trading 0.3% higher at 8,124.
Today investors turn their attention to Fed Chair Powell's semi-annual testimony before Congress. The speech should offer clearer signals on the future direction of the Fed’s interest rate path. Investors also anticipate key upcoming inflation figures set to be released on Thursday. The 10-year Treasury currently yields 4.30%, while gold trades at $2,360 an ounce, recouping some losses from yesterday’s session
British consumers reined in retail spending in June during a cold spell, according to separate data from Barclays, BRC, and KPMG. It’s another indication that poor weather contributed to lacklustre growth. Sterling trades at $1.2799 and €1.1831.
Narendra Modi’s visit to Moscow may offer clues as to how he intends to leverage foreign affairs in his third term, writes Mihir Sharma. Previously he’s balanced US ties with those to US rivals, but that may not be the case this time.
Freight rates for a VLCC (very large crude carrier) from the US to the key Asian market tumbled more than 20% since late May, according to the Baltic Exchange.
Boeing is in talks with the US Defense Department to preserve its government contracting business after agreeing to plead guilty. United Airlines said another of its Boeing aircraft lost a main landing gear wheel on takeoff — a near repeat of a March incident. Meanwhile, Airbus delivered 67 jets in June — its best monthly total of the year.
Source: Bloomberg
Company News
BP has today released a trading statement ahead of its detailed results on 30 July. The statement provides a summary of current estimates and expectations for the second quarter, including data on the economic environment as well as group performance during the period. Although the outlook for production is slightly better than expected, the refining business will see a decline in profit and an asset impairment of up to $2bn. In response the shares have been marked down by 3% in early trading.
BP is gradually transforming from an International Oil Company (IOC) to an Integrated Energy Company (IEC), with greater focus and increased efficiency. The group is planning to deliver at least $2bn of cash cost savings by the end of 2026 relative to 2023, around 10% of the total. This will be driven by high grading its portfolio, digital transformation, supply chain efficiencies, and the use of global capability hubs.
By the end of the decade, the company aims to have built a portfolio of transition growth engines (TGEs), with investment expected to reach $7bn-$9bn a year in 2030. Half will be invested where BP has established businesses, capabilities, and track record – bioenergy, convenience, and EV charging – with the other half in hydrogen and renewables & power. EBITDA (i.e., cash profit) from TGEs is expected to grow to $3bn‑$4bn in 2025 and $10bn-$12bn in 2030 (i.e. 20% of group profit).
BP is not abandoning hydrocarbons – far from it. Instead, it is ‘high-grading’ its business towards a focused portfolio of resilient high-quality oil and gas projects that generate premium free cash flow. This will help meet near-term demand for secure supplies of oil and gas, generating additional earnings that can further strengthen BP and support investment in its green transition. The incremental investment will target shorter-term, fast-payback projects that maximise value and deliver rapidly with minimal new infrastructure. Oil and gas production will be around 2.3m barrels a day in 2025 and 2.0m b/d in 2030, 25% lower than in 2019.
The overall capital investment of $14bn-$18bn a year includes acquisitions, providing some reassurance the company won’t engage in large-scale, value-destroying M&A. The company is targeting group EBITDA of $46bn-$49bn in 2025 and $53bn-$58bn in 2030 in a $70/barrel oil price environment, and return on average capital employed of over 18%, which it achieved in 2023.
In the three months to 30 June, upstream production is now expected to be broadly flat compared to the prior quarter, versus previous guidance to be slightly lower. This will be made up of production broadly flat in the oil production & operations unit and slightly lower in gas & low carbon energy.
In the gas & low carbon energy segment, price realisations, compared to the prior quarter, are expected to have an adverse impact of around $0.1bn. This includes declines in non-Henry Hub natural gas marker prices. The gas marketing and trading result is expected to be average following a strong result in Q1.
In the oil production & operations segment, price realisations, compared to the prior quarter, are expected to have a favourable impact in the range of $0.1bn-$0.3bn, including the impact of price lags on bp’s production in the Gulf of Mexico and the UAE.
In the customers and products segment, the group has seen stronger fuels margins and convenience performance, and seasonally higher volumes. However, in the products segment, significantly lower realised refining margins are expected to have an adverse impact in the range of $0.5bn-$0.7bn mainly relating to weaker middle distillate margins and narrower North American heavy crude oil differentials. The unit has also been impacted by a higher level of turnaround activity, partially offset by the absence of the Q1 Whiting refinery outage of around $0.5bn. The oil trading result is expected to be weak following a strong result in Q1.
The results will also include a post-tax adverse adjusting item relating to asset impairments and associated onerous contract provisions in the range of $1.0bn-$2.0bn, including charges relating to the ongoing review of a refinery in Germany that was announced in March.
As expected, today’s statement doesn’t provide details on operating cash flow, net debt, or shareholder distributions – that will come with the results on 30 July. As a reminder, the group remains committed to maintaining a strong investment grade credit rating and targets a resilient cash balance point of around $40 per barrel Brent oil price. This provides the capacity to grow its dividend by around 4% a year at around $60/barrel. In addition, the company is committed to returning at least 80% of surplus cash flow to shareholders. The $1.75bn quarterly share buyback programme announced with the Q1 results is close to completion and the group is expected to announce a further programme with its results at the end of July. BP has previously committed $14bn of buybacks by the end of 2025. This means the annual return to shareholders could amount to 12% of the current market cap. Although today’s update is slightly below market expectations, we don’t expect it to derail the group’s capacity to return capital to shareholders.
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, is 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 uncertainty. Although execution of the group’s low carbon strategy, particularly in terms of capital discipline, will have some impact on the share price, far more important in the medium term will be commodity prices and cost cutting, and the cash flow and shareholder returns generated as a result.
The shares have drifted lower over recent months and remain on an undemanding valuation, both in absolute terms and relative to its US majors, which fails to discount the potential for free cash flow generation and shareholder returns. We believe they also provide something of a hedge against inflation, while recent consolidation in the sector – Exxon buying Pioneer and Chevron buying Hess – provides further support.
Source: Bloomberg