All change as BP talks up long-term returns
Renewables spending is being slashed as BP focuses on driving cash flows from oil and gas production. What will this latest overhaul mean for shareholder returns?
26th February 2025 13:14
by Graeme Evans from interactive investor
A reset of BP (LSE:BP.) failed to inspire a revival in stock market fortunes today as the oil giant’s plans for higher returns by 2027 were offset by near-term pressure on shareholder distributions.
BP shares reversed as its updated financial framework showed it plans a buyback worth between $750 million and $1 billion alongside April’s first-quarter results.
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That compared with the $1.75 billion announced with this month’s fourth-quarter results, a figure many in the City viewed as unsustainable given net debt of $23 billion.
BP intends to cut borrowings to between $14 billion and $18 billion by the end of 2027 as it pursues a new strategy of divestments, cost savings and reduced capital expenditure.
A promise of a “resilient” dividend may also have left shareholders underwhelmed, with the oil giant promising to increase the ordinary payout by at least 4% a year.
This compares with 10% increases across the previous two financial years, which have left the most recent quarterly payment at eight US cents a share.
The ultimate goal for the company is to distribute 30%-40% of operating cash flow, which stood at $7.4 billion in the most recent quarter and $27.3 billion across 2024.
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Unveiling the new strategy, chief executive Murray Auchincloss said: “This is a reset BP, with an unwavering focus on growing long-term shareholder value.”
This objective will be achieved through the reallocation of capital expenditure towards BP’s highest-returning businesses.
Oil and gas investment will increase to $10 billion a year, with a decade-end production target of 2.3-2.5 million barrels of oil equivalent a day set to mean $2 billion of additional operating cash flow in 2027.
The reshaping of the portfolio to drive growth will be at the expense of investment in transition businesses, where spending drops more than $5 billion on previous guidance to between $1.5 billion and $2 billion.
This results in selective investment in biogas, biofuels and EV charging, capital-light partnerships in renewables and focused investment in hydrogen/carbon capture storage.
That’s a far cry from last February’s 2023 results, when Auchincloss said BP’s destination was unchanged - a transformation from an International Oil Company to an Integrated Energy Company. This followed a strategy put in place in early 2020 by former boss Bernard Looney.
Today’s changes mean that BP will look to bring in a partner for utility-scale solar and battery storage business Lightsource, having only completed the acquisition of the remaining 50.03% stake in October.
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It will also carry out a strategic review of the lubricants business Castrol, which has been part of BP since the company’s acquisition of Burmah-Castrol in 2000.
BP is targeting $20 billion of divestments by the end of 2027, as well $4-5 billion of structural cost reductions over the same time frame. It plans for total capital expenditure of $13-15 billion in 2027, compared with $16.2 billion in 2024.
Helge Lund, who is overseeing his second major reset of strategy since his appointment as chair in 2019, said the moves were driven by the significant changes “we have seen in energy markets and our purpose of delivering energy to the world today and tomorrow”.
He added: “This new direction places free cash flow growth, returns and value at its heart”.
BP shares are down 7% in the past year, whereas Shell (LSE:SHEL) is up 7% on City confidence that it is best placed among Europe’s Big Oil stocks to sustain shareholder distributions in 2025.
Under the leadership of Wael Sawan, Shell has already improved cost and operational efficiencies as well as constrained capital expenditure.
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