BP Q4 RC Loss Widens, Underlying RC Profit Meets Street; Suspends Share Buyback; Stock Down

BP reported a fourth-quarter replacement cost (RC) loss of $2.76bn while underlying RC profit rose to $1.54bn (10 US cents per share; $0.60 per ADS), in line with analyst expectations. Revenue and sales held up ($47.74bn total revenue; $47.38bn sales, above the Street's $42.33bn), adjusted EBITDA grew to $8.96bn, but loss before tax widened to $1.50bn and loss per ADS deepened to $1.33. The board suspended the share buyback to prioritize balance-sheet strengthening, and BP reiterated FY2026 guidance of slightly lower reported upstream production with underlying upstream broadly flat, targeting $9–$10bn of divestment proceeds (≈$6bn from Castrol) weighted to H2.

Analysis

Market structure: BP’s suspension of buybacks is a clear win for creditors and liquidity providers and a loss for short-term equity holders; expect further equity underperformance vs. peers (BP down ~3.3% intraday) while credit spreads should compress as cash is conserved. Underlying adjusted EBITDA rose to $8.96bn even as RC loss widened to $2.76bn, signalling operational resilience but weaker capital returns; upstream guidance (Q1 broadly flat, FY26 slightly lower) implies neutral near‑term production supply pressure on oil prices rather than a supply shock.

Risk assessment: Tail risks include a >20% oil-price slide in 3 months, a surprise UK windfall tax or regulatory action, or delay/failure of the ~$6bn Castrol sale — any would materially damage cash-return timelines and equity valuation. Near-term (days–weeks) expect elevated equity volatility and downside of 5–12% on sentiment; medium-term (months) hinge on H2 2026 divestment receipts ($9–10bn target); long-term (quarters) BP can re-rate if deleveraging targets met and buybacks resume.

Trade implications: Favor relative-value and cross-asset trades: short BP equity (BP) vs long higher-return peers (SHEL, XOM) for 6–12 months; buy BP senior debt if 5–7yr spreads trade >100bp over UST with target compression 30–50bp after divestments. Options: use a 3‑month put spread (buy 38/34) to hedge near-term downside and consider 9–12 month OTM calls if price < $34 as contrarian call on buybacks resuming.

Contrarian angle: The market may over-penalize BP’s equity for a temporary capital-allocation pause — underlying cashflow (EBITDA ~$9bn) plus $9–10bn disposal pipeline implies buybacks likely to resume H2 2026 if Castrol closes. A disciplined entry below $36 (current ~$37.9) with a 12‑month view captures mispricing risk; unintended consequence: successful deleveraging could tighten credit spreads and lift equity sharply, rewarding credit-to-equity pairs.

Key Decisions for Investors

• Establish a 2–3% portfolio short in BP PLC (NYSE:BP) equity within 5 trading days, target a 10–15% downside in 3 months; place a stop-loss at +8% from entry and reassess on confirmation/failure of Castrol sale.
• Implement a 2–3% pair trade: long Royal Dutch Shell (SHEL) or Exxon Mobil (XOM) and short BP equal notional for 6–12 months to capture differential return-of-capital policies; trim if spread narrows by 200bps or after H2 2026 divestment close.
• Buy BP senior unsecured bonds (5–7yr) or equivalent exposure if BP spreads >100bp over UST; allocate up to 3% and target spread compression of 30–50bp within 12 months as balance-sheet strengthening reduces credit risk.
• Purchase a 3‑month BP put spread (30–40% notional hedging size vs equity short) — example 3‑month 38/34 put spread — to hedge near-term volatility; if BP trades below $34, scale into 9–12 month OTM calls (e.g., strikes 40% OTM) sized 1–2% for contrarian upside play.
• Do not add large long-equity positions until either (a) Castrol sale proceeds are confirmed (expected H2 2026) or (b) BP announces explicit return-of-capital timeline; reassess for accumulation if BP < $34 with target price $45–48 over 12 months.