Since hitting a three-year low back in April, the BP (LSE: BP.) share price has been steadily climbing and is now 31% higher than it was back then. But as the stock continues to rise so the dividend yield has come down.
Now that the company has pivoted back to what it does best (oil), I’m starting to sense that the window of opportunity to lock in an attractive yield could be closing right in front of investors’ eyes.
Growing upstream
Earlier this year, at its investor update, the oil major announced that it intended to grow upstream production to 2.3m-2.5m barrels of oil equivalent a day in 2030. Certainly, 2025 has been a very busy year for its exploration and production teams.
So far in 2025 it has made 10 exploration discoveries – its best performance in recent memory. The headline grabber is the well in the Bumerangue block, located in Brazil’s Santos basin, this is its largest discovery in 25 years. But there’s also the huge potential from the Kirkuk oil and gas fields in Iraq, which are estimated to contain up to 20bn barrels of potential resource.
In addition, it has taken four final investment decisions this year. This includes the Shah Deniz Compression project in Azerbaijan, a major phase toward full development of a huge gas field.
Costs
One major issue that has beset the company for years is rising costs. Between 2019 and 2024 total costs increased by $10bn. Of this, $2bn related to underlying operating expenditure; that is costs directly within its control. It’s little wonder that activist investor, Elliott Management, has been demanding radical change.
During its strategy reset back in February, BP laid out plans to target between $4bn and $5bn structural cost reductions. These reductions will be delivered from three buckets.
Firstly, through a reduction in the contractor workforce. By the end of the year over 15% of its total workforce will have left the business. Secondly, through supply chain efficiencies, across both upstream and downstream. And thirdly through divestments, primarily from the sale of Castrol and Gelsenkirchen, its German refinery.
As of H1 2025, it has delivered $1.7bn in structural cost reductions.
Price assumptions
There remains significant risk investing in BP today. It’s by no means out of the woods. Growing free cash flow at a compound annual growth rate of 20% out to 2027, is partly predicated on future oil price assumptions, which could turn out to be wrong.
At the moment, oil prices remain significantly below its price assumption of $71.5 for 2025. Should this continue for a protracted period, the risk of it failing to deliver on its 2027 targets undoubtedly grows.
The other major issue is a significant net debt position of $26bn. It’s targeting $14bn-18bn, but this will not be achieved should it be unsuccessful offloading Castrol, together with its solar business, LightSource bp.
Bottom line
After it laid out its strategy reset at its investor update earlier this year you could almost hear the collective sigh of relief from long suffering investors. BP remains one of the big players in the industry and I don’t see that changing. I’m continuing to buy the shares at every available opportunity while they’re cheap, but i can’t say with any certainty when they might recover fully.
