It’s been a massive day for earnings reports in the UK and Europe. HSBC kicked things off and exceeded profit estimates, it also announced a chunky $3bn share buyback. Deutsche Bank added to the good news for the European and Asian banking sector and delivered a stunning Q1 performance, boosted by fixed income trading. Astra Zeneca reported stronger than expected results for Q1, and confirmed its full year guidance, although it remains highly exposed to US pharma tariffs as nearly half of the firm’s revenue is generated from the US, which is weighing heavily on its share price on Tuesday.
The FTSE 100 is underperforming in Europe on Tuesday, as the index is weighed down by Astra Zeneca and BP’s poor performance. Below we take a look at what went wrong for BP last quarter.
BP: results deep dive
There was more bad news for BP, as it continues to see its woes pile up. The company reported slightly stronger than expected revenues last quarter, but that was where the good news stopped. Gross profit margin shrunk to 35.3%, down from 40.9% in Q4 2024. Net income was lower QoQ at $1.38bn, capex spend was cut, and the share buyback was slashed to a mere $750mn, at the low end of guidance. There were also fundamental issues with the financial health of the company, which has deteriorated sharply in the past year.
A warning sign about the company’s financial health
The company’s net debt and cash flow position was under the microscope for this earnings report. Net debt surged to just under $27bn, significantly higher than the $24bn from a year ago. This is troubling since the oil price remains weak, which makes it harder for the company to pay off this debt. It also suggests a failure of strategy, the company had said that it wanted to bring down net debt in recent quarters, instead it is back at the highest level since 2022. The company has said that it wants to protect it’s A grade credit rating, however, will the agencies be happy with the plan to reduce net debt to $14bn – 18bn by 2027, when the oil price remains weak?
Free cash flow dependent on future asset sales
Free cash flow also flashed red in this earnings report, and was a mere $2.8bn last quarter, half the level of a year ago, and back at levels last seen in 2020. The company explained this decline due to annual bonus payments (not good), and future divestments of non-carbon assets (good). Some of the hit to free cash flow is down to asset sales and divestments, something that activist investor Elliott has pressed for, as it tries to reshape the UK oil giant.
$5bn of assets have been classified as ‘held for sale’, according to Bloomberg, and has been removed from free cash flow. Thus, as long as the sales of these low carbon assets goes ahead without any problems, then free cash flow should rise in the coming months. However, two things stand out, 1, will these low carbon assets be sellable in a world that is turning back towards hydrocarbons? And 2, it is symptomatic of an issue with the way that the company is run, that free cash flow takes a hit from annual bonuses, when the firm is still trailing its peers, and has to sell off the ‘family silver’ to boost its cash position. This is not a comfortable place for the company or CEO Murray Auchincloss, who must be close to the eleventh hour of his tenure at the oil giant.
BP: no longer relying on its coffee business
Gone are the days when BP used its earnings report to boast about how many cups of coffee it sold in its convenience store businesses. These days, some of those convenience businesses in the Netherlands and Austria are part of BP’s asset sales
Stock price problems ramp up pressure on Auchincloss
The stock price is down more than 3% on Tuesday and is one of the weakest performers on the FTSE 100 right now. Its stock price is down 17% over the past month. This compares to a 12% decline for Shell and an 8% decline for Exxon over the last 4 weeks. The gap between BP and its peers is widening, which is unlikely to please Elliott, the activist investor who is pushing BP back into carbon energy and to make extreme cost savings and divestments.
We believe that this update from BP is unlikely to be enough for Elliott, and it will be interesting to see if its next move is to cut not only the Strategy chief, but perhaps Auchincloss himself. The CEO is a lame duck, with Elliott likely to call the shots from here. The investor call with the CEO and CFO takes place later this afternoon, and it will be interesting to see how the company tries to spin these results. Looking forward, we think that BP will need to speed up asset sales and go further on cost cutting to please Elliott, otherwise they could ramp up the pressure on the firm.
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