BP PLC (LSE:BP.) has some big strategic questions to answer, says Canadian bank RBC and it is hoping that a planned capital markets day on 26 February will clear up a lot of them.
“The event should stand as a significant line in the sand following the initial energy transition strategy presented in 2020, one that included macro assumptions that look out of tune with reality,” said the bank.
“The crux of BP's issues relate to poor capital allocation alongside these strategic shifts, which have deteriorated its earnings potential.
“While there are no easy fixes, we see the event as much needed re-set to the investment case.”
BP’s shares have de-rated in recent years, adds the bank and it wants a change in tack from the oil giant, in particular moving from ‘leadership’ in energy transition, ie spending, to a more disciplined approach.
“Overall, we expect the capex framework to reduce from US$14-18 billion a year to $13-16bn, with near-term spending towards the low end.
“We expect cost-cutting to help support this but do not anticipate it being a main feature of the event.
RBC also has balance sheet concerns, noting that despite the ‘exceptional business environment over 2022-24’, BP’s debt levels have remained stubbornly high, due to buybacks and acquisitions.
“Net debt including leases and hybrids now sits around $50bn, and we expect the company to announce a US$10bn disposal programme over 2025-27E to support net debt reduction.”
BP’s high leverage vs peers leaves its shareholder returns framework less defensive in a potential down-cycle, adds the bank.
How BP squares reducing its debt and providing an attractive shareholder return for investors is another conundrum.
“We expect a move to a simplified 30-40% payout ratio, and think that moving to the low end would make sense to help reduce debt, however, we think market buyback expectations are in the region of $1bn per quarter (down from $1.75bn, RBCe $750m)."
This might be flagged in the upcoming fourth quarter numbers rather than CMD, adds RBC, but either way it leaves BP offering a total return similar to Shell and Total but with inferior earnings growth prospects and less defensiveness.
There are better risk-reward options elsewhere in the sector, concludes RBC, which has a Sector Perform rating and a 480p target price.