At the 2025 Berkshire Hathaway annual shareholders’ meeting, Warren Buffett explained that he spends more time looking at a company’s balance sheet than he does at its income statement.
The American billionaire investor said that before examining a potential target’s income and expenditure he likes to “look at balance sheets over an eight- or 10-year period”. His rationale is that it’s more difficult to “play games” with this aspect of a group’s financial statements.
Buffett reckons adopting this approach to a company’s accounts is the best way to “understand what the figures are saying, and what they don’t say, and what they can’t say, and what the management would like them to say that the auditors wouldn’t like them to say”.
Over the Christmas period, I’ve been reviewing some of my investments. In particular, I’ve taken a closer look at BP (LSE:BP.). And with Buffett’s words ringing in my ears, I decided to look at the energy giant’s balance sheets since 2017.
This is what I learned.
Getting smaller
The first thing I noted is that the group’s shrinking. At 31 December 2017, it had a book value of $100.4bn. At 30 September 2025, it was $77.6bn. Over the period, the group’s assets have increased by around $4bn. However, more significantly, its liabilities are nearly $27bn higher.
Comparing the two balance sheets, it can be seen that the group’s net debt (including leases) has increased from $37.8bn to $39.6bn. Admittedly, this is lower than the $55bn reported at the end of 2019. But it’s been steadily increasing since 31 December 2022.
This doesn’t sound too promising. No wonder some of the company’s largest shareholders are applying pressure on the group’s directors to get this down. Just before Christmas, BP announced it had entered into an agreement to sell some of its stake in Castrol, its lubricants business. All of the $6bn of proceeds will be used to reduce the group’s borrowings.
But looking at BP’s 2017-2024 accounts is a reminder of how cash generative the business can be. During this period, it reported combined operating cash flows of $216bn. That’s why the group’s former boss described it as “a cash machine” when energy prices are in its favour.
It also illustrates how volatile the group’s earnings can be. Its preferred measure is replacement cost (RC) profit. In 2022, this was $27.7bn. Two years earlier, during the pandemic, it disclosed a RC loss of $5.7bn.
Of concern, my review’s also revealed that BP’s become more bloated. It now employs 26,500 more people than it did in 2017. Rising administrative expenses is another issue worrying some larger shareholders.
Final thoughts
So where does this leave us? Well, I still think BP’s worth considering for its potential.
If it can become more efficient then it will be able to improve its profit margin. Yes, its earnings will still be at the mercy of — most significantly — the price of oil, but for every $1 of revenue, its bottom line will be higher than previously.
And reducing its debt will lower its borrowing costs. This could free up more cash for shareholder distributions.
For those uneasy at investing in the oil and gas sector, I think there are plenty of other opportunities to consider but, personally, I reckon BP’s one to look at.
