Berenberg Downgrades BP: Gas Sector Challenges Cloud Near-Term Outlook
15min read The investment community is closely watching bp plc (LON:BP) after Berenberg Bank revised its financial forecasts for the energy giant, citing significant headwinds in its Gas & Low Carbon Energy division. The downgrade underscores a critical question: Can BP navigate declining gas profitability while maintaining its dividend and growth trajectory?
The Gas Profitability Decline: A Deep Dive
Berenberg’s adjustments to BP’s estimates are rooted in a stark underperformance in its Gas & Low Carbon Energy division during Q1 2025. The segment’s underlying replacement cost (RC) profit before interest and tax fell to $1.0 billion, a 50% drop from $2.0 billion in Q4 2024 and a 40% decline year-over-year from $1.658 billion in Q1 2024. Three key factors drove this deterioration:
- Weak Gas Marketing and Trading: Unfavorable trading outcomes in gas marketing dragged down profitability, with volatile commodity prices and execution challenges undermining results.
- Lower Production Volumes: Strategic divestments—such as asset sales in Egypt and Trinidad—reduced output, while upstream production growth in other areas (up to 1,475 Mboe/d) failed to offset these losses.
- Rising Costs: Non-cash expenses and startup costs for major projects, including new energy initiatives, added financial pressure.
Financial Impacts and Berenberg’s Adjustments
The gas division’s struggles prompted Berenberg to slash its 2025 adjusted EPS forecast by 9.8%, with further reductions of 6.3% for 2026 and 3.7% for 2027. The bank also lowered BP’s price target from £3.95 to £3.85, reflecting near-term risks.
Despite the downgrades, BP maintained its dividend of 8 cents per share, supported by disciplined cash flow management. The company’s Q1 operating cash flow fell to $2.8 billion (down from $7.4 billion in Q4 2024), but it still executed a $0.75 billion share buyback, underscoring its commitment to shareholder returns.
Why Investors Should Pay Attention
The Berenberg downgrade highlights two critical risks for BP investors:
- Gas Sector Volatility: BP’s gas division remains exposed to trading fluctuations and cost overruns on new projects. A prolonged slump could strain margins further.
- Divestment Trade-Offs: While asset sales strengthen BP’s balance sheet, they also reduce near-term production and revenue streams.
However, BP’s broader strategy offers a counterbalance. Its upstream operations remain robust, with production growth and a focus on high-margin projects. Additionally, its free cash flow-to-equity yield of 7-8% through 2026 supports dividend sustainability, even amid gas headwinds.
Conclusion: Navigating the Near-Term Clouds
Berenberg’s adjustments are justified given the Gas & Low Carbon Energy division’s Q1 underperformance. However, BP’s fundamentals remain intact: strong cash flow, disciplined capital allocation, and long-term growth initiatives in low-carbon energy.
Investors should monitor two key metrics:
1. Gas Division Turnaround: A rebound in gas marketing/trading results and production volumes post-divestments could alleviate concerns.
2. Cost Discipline: Containing startup expenses and non-cash charges will be critical to restoring profitability.
For now, BP’s stock faces near-term pressure, but its resilient dividend and strategic focus suggest it remains a play for long-term energy investors. As Berenberg noted, the gas sector’s challenges are sector-specific—not a sign of systemic weakness.
Final Take: Hold BP for now, but keep a close eye on gas profitability trends and cost management. The stock’s valuation—trading at 6.5x 2025E EV/EBITDA—offers some cushion, but recovery hinges on stabilizing the gas division.
In sum, BP’s near-term path is clouded, but its long-term strategy retains merit. Investors should stay patient, but not complacent.
