BP shares under pressure after S&P Global downgrade over share buyback plans

By Louis Goss

BP shares were under pressure on Tuesday after ratings agency S&P Global downgraded its outlook for the British oil company over concerns its share buyback plans will leave it unable to lower its debts.

S&P Global downgraded its outlook for BP from 'positive' to 'stable' as the ratings agency said its current share buyback plans mean the oil major is unlikely to reduce the size of its $24 billion debts, in a blow to CEO Murray Auchincloss who took control of the firm this year.

Shares in BP (UK:BP) (BP), listed on the London Stock Exchange, fell 3% on Tuesday having lost 1% of their value in the year-to-date.

The rating's agency's downgrade follows BP's pledge in February to use 80% of all surplus cash flow to buy back its stock from shareholders, compared to 60% previously, and to also hike its dividend to 10%.

Auchincloss announced the plans shortly after taking up the position as BP's CEO in January, as the world's largest oil firms have boosted their share buyback plans on the back of the bumper performances they have posted since the start of the war in Ukraine.

S&P Global on Monday, however, said BP's plans will likely see the oil major struggle to reduce its debts, even with the currently supportive market conditions.

"We forecast BP's revised cash allocation strategy will not result in meaningful further debt reduction," S&P Global said.

This is set to see BP fall even further behind its rivals Chevron (CVX), Shell (UK:SHEL), and Exxon Mobil (XOM) which all have markedly stronger balance sheets than the FTSE-100 firm, S&P Global said.

At the end of 2023, BP's funds from operations (FFO) to debt ratio was well below its peers at 41.9% compared to over 75% for Chevron, Shell, and ExxonMobil.

"The gap in terms of balance sheet strength between BP and the other supermajors will likely persist, and not narrow," S&P Global said.

S&P Global said it expects this gap between BP and its peers will continue to widen, despite the supportive market conditions that are set to see it post a "solid performance" in 2024 as it pushes ahead with cost-savings initiatives in its upstream division.

"We expect BP to maintain its FFO to debt at around 50% on average in 2024-2026, even at our supportive oil price assumptions of $80/boe Brent and above-average refining margins," the top ratings agency said.

S&P Global said it also expects BP's hydrocarbon production will remain stable or even increase, despite the company's stated long-term ambitions to cut production of oil and gas in line with its climate goals.

BP declined to comment.

-Louis Goss

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06-04-24 0725ET

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