BP reaches its 2027 debt goal about a year early, and flags up to $4.5 billion of new write-downs

BP said Tuesday it expects net debt of $13.5 billion to $14.5 billion at the end of September, down from $22.3 billion three months earlier, reaching a debt goal it had set for the end of 2027. The same update warned of $3.0 billion to $4.5 billion in new write-downs, mostly in the transition businesses of its gas and low carbon energy segment.

Debt falls faster than planned

The net debt estimate came in a trading statement published ahead of BP's third-quarter results, which are due Oct. 30. BP had previously aimed to cut net debt to between $14 billion and $18 billion by the end of 2027, so the new range puts it at that goal about a year early.

BP said the reduction includes the redemption of $1.0 billion of hybrid securities on Sept. 30, which leaves about $12.0 billion of hybrid bonds and securities outstanding, along with around $1.0 billion of higher income taxes paid, a working-capital release of zero to $1.0 billion and capital spending of around $3.0 billion. It expects the combined total of net debt, hybrid bonds, leases and Gulf of America settlement liabilities to fall by around $9.0 billion to $10.0 billion from the second quarter.

According to Reuters, the decline was helped by a pause in BP's buyback program this year, high prices and asset sales. The figures do not include the $6 billion sale of a stake in its Castrol lubricants business.

Refining margins jump

BP's refining indicator margin averaged $46.7 a barrel in the third quarter, up from $29.6 in the second quarter. Reuters put the year-earlier figure at $15.8 a barrel, while noting that BP has changed how it calculates the margin in recent years, which makes historical comparisons difficult. BP said stronger realized refining margins would lift its products business by $1.9 billion to $2.1 billion compared with the second quarter.

The backdrop is the Iran war. Oil prices have surged past $100 a barrel because of the conflict, which has effectively closed the Strait of Hormuz, RTÉ reported. Brent averaged $96.99 a barrel in the third quarter, BP said, down from $103.85 in the second. Rival Shell said last week it expected a record high third-quarter refining margin.

Not every business improved. BP expects a significantly lower result in its customers business, driven by weaker fuels margins, higher base oil prices at Castrol and a lower contribution from midstream. Refinery throughput is expected at 1,375 to 1.41 million barrels a day, down from 1.47 million in the second quarter, reflecting the Gelsenkirchen divestment completed on July 31. The gas marketing and trading result is expected to be significantly higher than in the second quarter, while oil trading is expected to be broadly flat. Upstream production should come in at 2.19 million to 2.24 million barrels of oil equivalent a day, against about 2.2 million in the previous quarter.

Another round of low-carbon write-downs

The third-quarter results will include post-tax impairments of $3.0 billion to $4.5 billion, which BP said are primarily attributable to transition businesses in its gas and low carbon energy segment. The charges will be excluded from underlying replacement cost profit, BP's preferred profit measure. The statement did not say which assets are affected.

It is the second time in a year that BP has booked large write-downs in its low-carbon business, after writing down over $4 billion related to its solar, biogas and offshore wind businesses. Impairments in BP's transition businesses over the last year have added up to around $10 billion. RBC analysts said that "showcases the damage BP's previous adventures have caused," adding: "We would imagine the house is now clean, but we also thought that last quarter."

RBC raised its net profit forecast for the quarter to $7.6 billion from $6.9 billion, while Citi analysts expect $6.9 billion. BP shares were 1.9% higher by 12:10 GMT, outperforming a 0.2% gain in an index of European energy companies, Reuters reported.

O'Neill's first strategy test comes in December

Meg O'Neill took over as chief executive in April, replacing Murray Auchincloss. She will lay out a strategy and outlook update in New York on Dec. 15, her first opportunity to spell out detailed plans, as BP faces pressure from activist hedge fund Elliott Management to bolster its balance sheet and reduce costs, according to RTÉ. She has already revealed plans to sell BP's U.S. biogas business, Archaea.

O'Neill has called deleveraging BP's top priority. "If you look at our history, in our sector, [we're] the company that has been the most levered for more than a decade," she said at the Energy Intelligence Forum in London last week, Energy Voice reported.

A company spokesperson said the December update would "set out the next phase of delivering a simpler, stronger and more valuable BP." Before that, the Oct. 30 results will show how large the refining gain and the write-downs turn out to be.