Morning Note: Market news and an update from BP.
Market News
Donald Trump’s economic team is said to be discussing slowly ramping up tariffs to avoid an inflation spike. One scenario involves a graduated increase by about 2% to 5% a month. US and European stock futures rose and the dollar weakened on the report. The 10-year Treasury yield remains elevated at 4.76%, while gold drifted to $2,670 an ounce.
In Asia this morning, equity markets were mixed: Nikkei 225 (-1.8%); Hang Seng (+1.9%); Shanghai Composite (+2.5%). Bank of Japan Deputy Governor Ryozo Himino signalled the possibility of a rate hike next week. Japan’s 40-year yield climbed to its highest since 2007.
The FTSE 100 is currently little changed at 8,215, while Sterling trades at $1.2240 and €1.1915. The UK auctions £1bn of 30-year index-linked gilts this morning, the first bond sales since last week’s market turmoil, when yields rose to the highest in decades and the pound fell to its weakest in over a year. The same inflation-linked note sold through banks in November received over £65bn of orders.
The Bank of France reiterated its forecast for zero economic growth in the final quarter of 2024, with Francois Villeroy stopping short of calling a recession. The ECB’s Olli Rehn predicts rates will reach neutral territory by mid-2025, with cuts potentially starting by midsummer. He sees disinflation on track in the euro area.
Source: Bloomberg
Company News
BP has today released a trading statement ahead of its detailed results on 11 February. The statement provides a summary of current estimates and expectations for the fourth quarter of 2024, including data on the economic environment as well as group performance during the period. The statement points to weakness in refining margins. The company expects to update on its medium-term strategic plans in late February. The shares have been strong over recent weeks on the back of the firm oil price, although today they have been marked down by 2%.
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.
The company will provide a strategic update on 26 February, a slightly later date than expected to allow the CEO to fully recuperate from a recently undertaken planned medical procedure. At the event, BP is expected to abandon its 2030 production target and scale back its energy transition strategy in a bid to regain investor confidence. The company is now expected to target several new investments in the Middle East and the Gulf of Mexico to boost its oil and gas output. The change of tact comes in response to the group’s poor share price relative to industry peers as investors have questioned the company’s ability to generate a return on investment under its current strategy. In recent months the company had already paused investment in new offshore wind and biofuel projects and cut the number of low-carbon hydrogen projects down from 30 to 10.
Back to today’s trading update. As already highlighted by other oil majors, in the three months to 31 December 2024, the trading backdrop was mixed: Brent crude averaged $74.73/barrel (compared to $80.34/barrel in the previous quarter); US gas Henry Hub averaged $2.79/mmBtu (vs. $2.15/mmBtu); and the refining margin averaged $13.1/barrel (vs. $16.5/barrel).
Upstream production is expected to be lower compared to the prior quarter, with production lower in oil production & operations and in gas & low carbon energy.
In the gas & low carbon energy segment, price realisations, compared to the prior quarter, are expected to have a favourable impact in the range of $0.1bn-$0.2bn 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 unfavourable impact in the range of $0.2bn-$0.4bn, including the impact of price lags on the group’s production in the Gulf of Mexico and the UAE. Compared to the prior quarter, exploration write-offs are expected to be $0.1bn-$0.2bn lower.
In the customers & products segment, the customers segment has been impacted by seasonally lower volumes, lower fuels margins, and a one-off inventory purchase price adjustment relating to the group’s bio-ethanol acquisition. The products segment has been impacted by weaker realised refining margins in the range of $0.1bn-$0.3bn and a higher impact from turnaround activity. The oil trading result is expected to be weak.
The underlying effective tax rate for the full year is now expected to be around 42% compared to the previous guidance of around 40% primarily due to changes in the geographical mix of profits.
Net debt at the end of the quarter is expected to be lower, as a result of $2.8bn from divestments, the issuance of $2.5bn of perpetual hybrid bonds primarily in anticipation of refinancing perpetual hybrid bonds callable in the next year or so, and acquired net debt of $3.0bn from the completion of the bp Bunge Bioenergia and Lightsource bp transactions. Further detail on operating cash flow, net debt, and shareholder distributions will be provided with the results on 11 February.
As a reminder, BP targets a resilient cash balance point of around $40 per barrel Brent oil price (vs. $80 currently) and has the capacity to grow its dividend by around 4% a year at $60/barrel. In addition, the company is committed to returning at least 80% of surplus cash flow to shareholders. The group bought back $3.5bn of stock in the second half of 2024. For now, the guidance of $14bn of buybacks during the two years to end 2025 is unchanged, although the group has stated that as part of the update to its medium-term plans in February, the company intends to review elements of its financial guidance, including its expectations for 2025 share buybacks.
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 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. Looking forward, we believe a strategic pivot back towards hydrocarbons would have a positive impact. Investors will then focus on the outlook for commodity prices and cost cutting, and the cash flow and shareholder returns generated as a result.
Source: Bloomberg