Is this the turning point for BP shares?

The path to recovery for an underperforming BP (LSE:BP.) share price has been set out after a City bank examined the oil giant’s options ahead of a strategy update on 11 February.

UBS believes the briefing alongside 2024 results can be an opportunity for BP to get on the front foot after a year of damaging speculation over the outlook for shareholder returns.

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It reckons the oil major is able to defend a $4 billion share buyback in 2025, a 43% reduction on this year’s level but a move that takes pressure off the balance sheet and should give the bears “one less argument to sell the shares”.

UBS warns that the main downside risk will be if BP fails to go far enough cutting the buyback programme, meaning there’s a rerun of the issues it experienced in 2024.

The widely held stock has lagged its peers that include Shell (LSE:SHEL) by 30% since early 2023 and by 10% this year, leaving the share price at around a two-year low at 380p. 

This year’s poor run follows four quarters in a row of City earnings downgrades, driven by disappointment over unplanned outages, a weaker than expected contribution from trading and the slow ramp-up of new growth engines.

The stock is trading at close to the replacement cost of supplies, a share price reaction that UBS thinks is overly punitive and one that fails to take into account BP’s ability for self-help and to change the narrative.

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UBS has a price target of 525p, pointing out that a big cut in the buyback is now priced in.

It said: “We see the upcoming strategy update as a key opportunity for BP to address concerns through a reduction of capital expenditure, lowering of the buyback and focus on growth.”

The bank is not expecting a wholesale change of strategy from chief executive Murray Auchincloss in February but views recent speculation that BP has abandoned a target to cut output by 2030 as consistent with a returns focused message.

BP told investors in October’s third-quarter results presentation that it planned to review elements of its financial guidance, including expectations for 2025 share buybacks.

In February this year, the company highlighted the potential to return more than $14 billion through buybacks over the 2024-25 period in the prevailing environment at the time.

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The bank’s $4 billion buyback estimate for 2025 assumes an oil price of $75 a barrel, asset sales of $3 billion and is based on the policy to return 80% of surplus cash flow.

It believes there’s room to lower capital expenditure guidance by about $2 billion a year.

The bank said: “BP’s capital intensity is the highest among peers and reflects more capital having been dedicated towards the transition.

“However, with many of those investments now put on hold, we estimate $2 billion of potential downside to BP’s 2025-2030 capex guidance.”

Operational expenditure is up $8.5 billion since 2019 and is comparable to Shell despite having a much smaller asset base. Management has launched a $2 billion savings target but UBS thinks there’s upside to this figure from the low carbon, trading and downstream segments.