BP Stock Downgraded: TD Cowen's Warning on Lower Netbacks, Higher Cash Calls

Ladies and gentlemen, buckle up! We've got a major development in the energy sector that you need to know about. BP, the oil and gas giant, has just been downgraded by TD Cowen. The reason? Lower netbacks and higher cash calls. Let's break this down and see what it means for your portfolio.



First things first, what are netbacks and cash calls? Netbacks are the revenue BP gets after accounting for transportation and other costs. Cash calls are the funds needed to meet operational and capital expenditure needs. Both of these have been affecting BP's financial performance, and it's showing in their stock valuation.

BP's operating cash flow for 2024 was $27.3 billion, which includes a working capital release of $1.3 billion. This cash flow was around $0.7 billion higher than the previous quarter, reflecting lower cash taxes paid and timing of provision settlements, partly offset by lower underlying earnings. The net debt reduced to $23.0 billion compared to the third quarter, primarily driven by the impact of proceeds from divestments of around $2.8 billion, the issuance of perpetual hybrid bonds of $2.6 billion and acquired net debt of around $3.0 billion from the completion of the bp Bunge Bioenergia and Lightsource bp transactions.

But here's the kicker: BP's underlying RC profit for the fourth quarter of 2024 was $1.2 billion, compared with $2.3 billion for the previous quarter. This decrease reflects weaker realized refining margins, higher impact from turnaround activity, seasonally lower customer volumes and fuels margins, and higher other businesses & corporate underlying charge. Ouch!

So, what does this mean for BP's future growth prospects? Well, BP has announced a further $1.75 billion in buybacks, indicating a commitment to returning value to shareholders. They've also laid the foundations for growth by reshaping their portfolio, sanctioning new major projects, and focusing their low-carbon investment. But is this enough to mitigate the effects of lower netbacks and higher cash calls?



Let's look at the numbers. BP's revenue for 2024 was $187.39 billion, a decrease of -10.06% compared to the previous year's $208.35 billion. Earnings were $390.00 million, a decrease of -97.44%. Not great, but not the end of the world either.

Now, let's talk strategy. BP needs to make some adjustments to mitigate the effects of lower netbacks and higher cash calls on its stock valuation. Here's what they should do:

1. Cost Reduction and Efficiency Improvements: BP has already made progress in reducing costs, delivering $0.8 billion in structural cost reductions in 2024. They need to keep this up and implement further cost-cutting measures and improve operational efficiency.

2. Portfolio Optimization: BP should focus on high-grading its portfolio by divesting non-core assets and investing in projects with higher returns. This can help in reducing the overall cash calls and improving the return on capital employed (ROACE).

3. Increasing Oil and Gas Production: BP should consider increasing its oil and gas production to generate more cash flow. This can help in mitigating the effects of lower netbacks by increasing the overall revenue.

4. Shareholder Distributions: BP should continue to prioritize a resilient dividend and consider share buybacks to return value to shareholders. In 2024, BP raised the dividend by 10% and delivered $7 billion in share buybacks, with an additional $1.75 billion announced for 4Q24.

5. Diversification into Renewable Energy: While BP should focus on increasing oil and gas production, it should also continue to invest in renewable energy sources to diversify its portfolio and reduce its exposure to volatile oil prices.

6. Debt Management: BP should focus on reducing its net debt to improve its financial flexibility and creditworthiness. In 2024, BP's net debt reduced to $23.0 billion, primarily driven by the impact of proceeds from divestments and the issuance of perpetual hybrid bonds. Continuing this trend can help in mitigating the effects of higher cash calls by reducing the overall debt burden.

So, what's the bottom line? BP's downgrade by TD Cowen is a wake-up call. The company needs to make some strategic adjustments to mitigate the effects of lower netbacks and higher cash calls on its stock valuation. But with the right moves, BP can still be a strong player in the energy sector. Stay tuned, folks, because this story is far from over!