Insights 
VT 
BP’s recent financial results reveal mixed outcomes, with shares declining from 8-month highs despite exceeding forecasts. Shareholder profits rose to $1.16bn from $206m year-on-year, although lower compared to the previous quarter. Year-to-date profits improved to $3.5bn, indicating overall progress for BP.
Underlying RC profits were steady, slightly surpassing expectations, while capital expenditure is projected to decrease by over $2bn in 2025. Cash flow exceeded estimates, yet net divestments in Q2 were only $28m. BP aims to divest $20bn in assets by 2027. The share buyback remained at $750m, despite rising net debt, now at over $26bn from $24.3bn the previous year, and increased gearing to 25.1%.
Long Term Sustainability
Operational improvements are noted, though they may not assure long-term sustainability. While suspending the buyback could negatively impact BP in the short term, it could potentially reduce net debt and stabilise the balance sheet long term. Achieving a net debt target of $14bn-$18bn by 2027 requires bold management decisions regarding future cash flow and assets. The market’s response to BP’s results remains cautious, leaving uncertainty over future transitions.
We see that even with profits beating forecasts, the market’s reaction has been muted, with the stock pulling back from recent highs. This suggests that the good news, supported by WTI crude prices which have held above $80 for most of this year, may already be factored in. Derivative traders should consider this a potential ceiling for the stock in the near term.
Debt Concerns
The most significant red flag for us is the rising net debt, now over $26 billion, which is heading in the wrong direction from a year ago. The decision to continue the $750 million buyback while gearing increases to 25.1% is questionable and puts pressure on the balance sheet. For context, looking back, we note BP’s gearing is now slightly above some of its European peers for the first time since the energy price spike of 2022.
Given the underlying weakness in the balance sheet, we believe there is an opportunity in the options market. The current calm reaction could mean implied volatility on BP options is relatively low, making puts an attractive way to position for a potential downside move. A suspension of the buyback or a disappointing divestment update could be the catalyst that causes the market to re-evaluate the stock.
Looking ahead, the plan to divest $20 billion in assets by 2027 seems ambitious, especially since the market knows BP is a motivated seller. We saw during the 2014-2016 oil price slump that forced divestments in the sector often happened at discounted valuations. Any difficulty in hitting these targets will make it harder to reach the net debt goal of $14-$18 billion and could further weigh on the share price in the coming quarters.
