COMMENTARY: BP Needs to Scrap its Big Oil Mentality, and its Buybacks

By Ron Bousso

• BP’s net debt reached $27 billion by end of Q1
• CEO aims to reduce net debt to $14-$18 billion by 2027
• Shares have underperformed rivals since strategy reset in February

LONDON, June 3 – BP has jumped from crisis to crisis in recent years, severely eroding the British firm’s stature as one of the world’s leading oil companies. Given the increasingly challenging dynamics in today’s oil market, BP may finally need to accept that it is no longer a true oil major and can’t keep managing cash like one.

The exclusive Big Oil club of Exxon Mobil (XOM.N), Chevron (CVX.N), Shell (SHEL.L), TotalEnergies (TTEF.PA) and BP (BP.L) has for decades been synonymous with sprawling upstream and downstream oil and gas operations, solid balance sheets and long-term strategies that have helped generate sizeable, stable shareholder returns.

But BP hasn’t ticked most of these boxes for years, having dealt with a succession of crises over the past 15 years that have slashed its market cap and left it financially vulnerable and lacking clear strategic direction. Most recently, a failed foray into renewables and a management scandal saddled the company with a ballooning debt pile as it struggles to revert back to oil and gas.

CEO Murray Auchincloss acknowledged the need for change when he unveiled in February a fundamental strategy reset that includes reducing spending to below $15 billion to 2027, cutting up to $5 billion in costs and selling $20 billion of assets in an effort to boost performance and rein in ballooning debt. The plan also reset the rate of shareholder returns to 30-40% of operating cash flow.

But the reset has done little to alleviate investor concerns. BP’s shares have declined by 18% since the strategy update, underperforming rivals.

Piling on the pressure, activist shareholder Elliott Management, which has recently built a 5% position in the company, has indicated it wants BP to cut spending even more.

There is, therefore, clearly a need for deeper change.

Market capitalization

CHANGE OF GUARD

While it may be challenging for the 116-year-old company to admit that it can no longer carry the same financial heft it once did, accepting reality will offer the company’s leadership an opportunity to reduce some of its commitments to investors, particularly its share repurchase programme.

All energy majors today have multi-billion-dollar buyback programmes that send capital back to shareholders, helping to attract investors who may be wary about the future of fossil fuel demand.

But BP’s buybacks feel like a luxury that is out of synch with its financial woes.

In its first quarter results released in February, BP said it would buy back $750 million over the following three months. That was lower than the $1.75 billion in the previous three months, but even at this reduced rate, this would still total $3 billion per year.

That doesn’t seem prudent, especially given the 20% drop in oil prices to around $65 a barrel this year and the darkening economic outlook.

Auchincloss’ financial objectives assume a Brent oil price of $70, meaning the Canadian CEO will most likely struggle to meet his targets without borrowing further.

BP’s net debt

DEFINE DEBT

Removing the annual $3 billion buyback would certainly upset investors, but it would go a long way towards reducing BP’s net debt to between $14 and $18 billion by 2027, compared with $27 billion at the end of March 2025.

The “ground zero” of BP’s financial decline was the deadly 2010 Deepwater Horizon disaster in the Gulf of Mexico, which generated $69 billion in clean-up and legal costs. The company continues to pay out over $1 billion per year in settlements.

The financial shock forced BP to sell billions of dollars of assets and issue huge amounts of debt to foot the bill. Its market value dropped to around $77 billion today compared to $180 billion in 2010.

BP’s debt-to-capitalization ratio, known as gearing, reached 25.7% at the end of the first quarter of 2025, significantly higher than those of other oil majors, including Shell’s 19% or Chevron’s 14%.

And, importantly, BP’s current $27 billion net debt figure omits several major liabilities held on its books. This includes $17 billion in hybrid bonds, an instrument that has qualities of both equity and debt, including a coupon that must be paid or accrued. While companies may issue hybrids for many reasons, including maintaining flexibility, they often do so in part because rating agencies do not treat hybrids as regular debt, which flatters the issuer’s leverage ratios.

Anish Kapadia, director of energy at Palissy Advisors, calculated BP’s adjusted net debt hit $86 billion at the end of the first quarter of 2025, when including net debt, hybrids, Gulf of Mexico liabilities, leases and other provisions.

Ultimately, cutting the buybacks should enable BP to tame its huge debt pile and repair its balance sheet faster. That, in turn, should create a strong foundation for rebuilding investor confidence.

The departure of current BP Chairman Helge Lund in the coming months could be a good opportunity for the company to consider such radical change. It’s unclear who will take this job, but one qualification for whoever succeeds Lund should be a much-needed sense of financial realism.

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By Ron Bousso; Editing by Nia Williams

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