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

Market News

US Core CPI for September was 2.4%, slightly higher than the 2.3% forecast. Initial jobless claims came in at 258K, worse than the 230k expected. Traders pared bets for a rate cut by the Fed next month after Raphael Bostic told the WSJ he’s open to skipping a reduction. But a November move is still the main scenario, with Austan Goolsbee, John Williams, and Thomas Barkin suggesting easing can continue even after the strong US CPI print.

The dollar strengthened, while the 10-year Treasury yield moved up to 4.10%. Gold has risen overnight to $2,640 an ounce. US equities ticked lower last night: S&P 500 (-0.2%); Nasdaq (-0.1%).

In Asia this morning, Chinese stocks fell (Shanghai Composite, -2.9%), underperforming their Asian peers (Nikkei 225, +0.6%) as caution grows ahead of a key weekend briefing that may shed more light on Beijing’s fiscal stimulus. Investors expect Beijing to announce a package of up to 2 trillion yuan ($283bn).

The FTSE 100 is currently little changed at 8,228. UK economy grew 0.2% in August, while Sterling trades at $1.3050 and €1.1932.

In France, the government would sell a record €300bn in bonds to finance its proposed budget plan, with the cost of servicing the debt swelling to €54.9bn. Spending would be cut and taxes increased to meet a 5% deficit in 2025. 440 large companies with revenues above €1bn would be hit by an “exceptional” tax lasting 2 years (to raise €12bn). Individuals earning more than €250K a year will see a temporary increase in income tax (to raise €2bn).

US bank earnings get underway today, with JPMorgan’s top line seen robust on higher trading revenue and investment banking fees. Fee growth in Wells Fargo’s deposit-related and investment management businesses probably won’t be enough to offset shrinking net interest income.

Source: Bloomberg

Company News

BP has today released a trading statement ahead of its detailed results on 29 October. The statement provides a summary of current estimates and expectations for the third quarter, including data on the economic environment as well as group performance during the period. This follows a recent press report which highlighted the potential for a strategic pivot back towards hydrocarbons. In the meantime, the outlook for shareholder returns (14% p.a. from dividends and buybacks) is very appealing. In response to today’s update, the shares are little changed 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.

However, Reuters recently reported BP is planning to abandon its 2030 production target when the new CEO unveils his strategy in February. The company is also set to 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. It is currently in talks to invest in three new projects in Iraq and is considering acquiring assets in the Permian shale basin to expand its existing US onshore business.

The move comes in response to the group’s poor share price relative to its 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 to 10 from 30.

Back to today’s trading update. In the three months to 30 September, the trading backdrop was mixed: Brent crude averaged $80.34/barrel (compared to $84.97/barrel in the previous quarter); US gas Henry Hub averaged $2.15/mmBtu (vs. $1.89/mmBtu); and the refining margin averaged $16.5/barrel (vs. $20.6/barrel).

Upstream production is now expected to be broadly flat compared to the prior quarter, versus previous guidance to be slightly lower.

In the gas & low carbon energy segment, price realisations, compared to the prior quarter, are expected to have a favourable impact of around $0.1bn, 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 $0.1bn-$0.3bn, including the impact of price lags on BP’s production in the Gulf of Mexico and the UAE. There is also expected to be an unfavourable impact in the range of $0.2bn-$0.3bn, compared to the prior quarter, as a result of higher exploration write-offs.

In the customers and products segment, the group has seen broadly flat fuels margins and seasonally higher volumes partly offset by costs. However, in the products segment, weaker realised refining margins in the range of $0.4bn-$0.6bn and the oil trading result is expected to be weak.

Net debt at the end of the quarter is now expected to be higher, driven primarily by the impact of weaker realised refining margins and by the rephasing of around $1bn of divestment proceeds into the fourth quarter. Further detail on operating cash flow, net debt, or shareholder distributions will be provided with the results on 29 October.

As a reminder, BP targets a resilient cash balance point of around $40 per barrel Brent oil price (vs. c $78 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 has committed to $3.5bn of buybacks in the second half and $14bn over 2024 and 2025 combined. This means the annual return to shareholders could amount to 14% of the current market cap.

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. 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.

Source: Bloomberg

Yesterday lunchtime, Delta Air Lines released Q3 results but published weaker-than-expected guidance for the current quarter. In response, the shares were marked down by 1%.

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 latest quarter, the group took delivery of nine aircraft. With an industry-leading global network, Delta and the Delta Connection carriers offer service to more than 290 destinations on six continents.

During the third quarter, the group was impacted by the CrowdStrike-caused outage which resulted in 7,000 flight cancellations over the five-day period. The direct revenue impact was $380m, primarily driven by refunding customers for cancelled flights and providing customer compensation in the form of cash and SkyMiles. The non-fuel expense impact was $170m, primarily due to customer expense reimbursements and crew-related costs. Fuel expense was $50m lower than it would have been. Overall, there was a 230 basis points negative impact on the margin and a 45c impact on EPS.

In the three months to 30 September, adjusted operating revenue was flat at $14.6bn, with adjusted total unit revenue (TRASM) down 3.6%.

International demand remained strong with trends improving through the quarter in Transatlantic and Latin. Delta’s diversified revenue base, led primarily by premium and loyalty, made up 57% of total revenue in the quarter. Premium revenue growth (+4%) continued to outpace main cabin (-5%). Total loyalty revenue grew 6%, driven by award redemptions and growth in co-brand card spend. Cargo revenue grew 27% on international volume strength. Managed corporate travel sales were up 7%, with double-digit growth in the tech, media, and banking sectors.

Adjusted non-fuel unit costs rose by 5.7% to $10.1bn, while fuel expense fell 6% to $2,771m, with fuel efficiency improving by 0.8%. Adjusted operating expense rose by 5% to $13.2bn and, as a result, the operating margin fell by 410 basis points to 9.4%. EPS fell by 26% to $1.50, a touch below the market forecast of $1.52.

Free cash flow was $95m, versus an outflow of $250m last year. Financial gearing fell to 2.9x net debt to EBITDAR, at the upper end of its 2x-3x target range as the group progresses toward investment grade ratings, which was received from Fitch during the quarter.

Demand for air travel remains strong, driven by an improving industry backdrop. However, the upcoming US presidential election is expected to temporarily slow travel spending. As a result, the group’s expectations for revenue in the current quarter are below the market forecast: revenue growth of 2%-4% to $13.9bn-$14.2bn (versus the market expectation of $14.2bn), an operating margin of 11%-13%, and EPS of $1.60-$1.85 (vs. consensus of $1.71).

Source: Bloomberg