Since the announcement of its strategic reset back in February, there has been no respite for the BP (LSE: BP.) share price. Tariff announcements and a resulting fall in oil prices to a four-year low, have turned the screw on an under pressure CEO to accelerate the company’s pace of change. As a long-term investor, my patience is being sorely tested and I’m now wondering if it’s time to move on.
Solid start to 2025
In its Q1 update released on 29 April, the beleaguered oil major posted a respectable set of results. Compared to Q4, underlying replacement cost profit rose $200m to $1.4bn. However, that figure was down 50% from a year ago, when oil prices were over $80.
The business is undoubtedly getting some things right. Operational performance is moving in the right direction. Refining availability stands at its highest level in 24 years and upstream operating efficiency is at record levels.
Structural cost reductions are also moving in the right direction. Up to 2027, it has earmarked savings of between $4bn-$5bn. Last year it delivered $300m of absolute reductions. Quarter on quarter, its absolute cost base is now $500 million lower.
A significant chunk of this cost savings will be related to the 3,000 contractors who’ve already left the business. Further headcount reduction is expected, with 3,400 contractor roles being scrutinised.
Unsustainable debt
For over a year now, my main concern has been the health of the balance sheet. In Q1, this showed no signs of improving. In just a year its risen another 12.5% to $27bn. This was mainly attributable to a seasonal build-up in working capital as it fills up its refineries ahead of peak summer driving and flying.
The company’s answer to a mounting debt crisis is divestments. At its capital markets day, it laid out plans to bring debt down to the range of $14bn-$18bn. I can see a lot of interest coming from buyers for Castrol, an iconic brand. Lightsource BP, I’m not so sure of. A partner might seem like the most appropriate option here, which won’t realise as much value.
Oil prices
Falling oil prices and a weakening global outlook, didn’t stop OPEC+ countries from agreeing to raise output by 411,000 barrels a day in June. Brent crude is already down 20% so far this year. And analysts are expecting the cartel to further increase output when it meets again in a month.
Following the announcement, Goldman Sachs cut its oil price forecast to the mid-$50s for the remainder of this year. My main fear is that if prices remain low for a protracted period of time, BP’s financial health will likely worsen.
That said, volatility and lower oil prices are hardly a new phenomenon. BP has a much lower break-even point than many of the US shale producers. Sustained lower prices would provide little incentive for them to drill.
Personally, I’m pleased that the oil major is focusing more on its upstream business. Exploration and production of oil and gas is what supports the growing dividend. Today, the yield is 6.8%. I will continue to be patient and reinvest my dividends. Ultimately, I see oil prices rising considerably in the years ahead and believe this will drive the share price up.
