BP halts buy-backs to preserve cash for balance sheet as it marks $3.4bn Q4 loss

BP reported a US$3.4bn Q4 loss driven by inventory holding losses and US$4.3bn of adverse post-tax adjusting items (including ~US$4bn of impairments tied to gas & low-carbon assets), while underlying replacement cost (RC) profit was US$1.5bn in the quarter and US$7.5bn for the full year. The group ended 2025 with US$24.5bn operating cash flow and net debt of US$22.2bn, has suspended share buybacks to allocate excess cash to the balance sheet, set 2026 capex at US$13–13.5bn (lower end of guidance), reiterated a US$14–18bn end-2027 net debt target and is executing a US$20bn disposal programme (including a planned majority sale of Castrol).

Analysis

Market structure: BP's suspension of buybacks and $22.2bn net debt reallocation directly benefits creditors and short-duration bond holders (lower near-term default/liquidity risk) while pressuring equity holders who lose a key return lever; competitors that maintain buybacks (e.g., XOM, SHEL) gain relative investor preference. The $20bn disposal plan and capex cut to $13–13.5bn signal slower upstream/transition investment, implying marginally lower long-run supply additions from BP but no immediate oil supply shock—Bumerangue (8bn bbls in place) is strategic optionality, not near-term production. Cross-asset: expect equity downside and spikes in equity vols, modest tightening of BP credit spreads versus peers, slight GBP pressure on a multi-week basis, and muted immediate effect on Brent unless multiple majors follow suit.

Risk assessment: Tail risks include failed disposals or asset sales taking >18 months (derailing net-debt targets), offshore Brazil exploration setbacks or cost overruns at Bumerangue, and regulatory/transition writedowns forcing further impairments (>US$5bn) — low probability but high impact. Immediate (days): equity repricing and vol spikes; short-term (weeks–6 months): disposal announcements, CEO transition (Meg O’Neill in April) and Q1 updates; long-term (12–36 months): delivery against $14–18bn net-debt target and realization of disposal proceeds. Hidden dependency: market pricing assumes smooth $20bn disposals — execution risk is the largest second-order driver.

Trade implications: Near-term tactical: short BP equity or buy 3-month puts (10% OTM) within 5 trading days to capture downside from suspended buybacks and inventory losses; size 1–3% portfolio. Credit play: establish 2% overweight in BP 3–5y senior bonds if yield>4.5% (or spread pickup >100bp vs iTraxx Main) to capture balance-sheet repair optionality. Relative value: long Exxon Mobil (XOM) vs short BP (BP.L) sized 1–2% for 3–12 months, favoring firms with stable buybacks. Avoid or underweight pure-play transition/gas names exposed to impairment risk for 6–12 months.

Contrarian angles: The market may over-discount BP because suspension is defensive, not permanent — the $20bn disposal program plus cheaper capex creates a plausible path to net debt <18bn by end-2027 and resume buybacks. Consider staged accumulation: build a 1–2% long position on an equity drawdown >=15% with a 12–24 month horizon to capture re-rating if disposals succeed or Bumerangue converts to reserves. Risk: disposals delay or commodity slump could erase equity value; keep positions size-limited and event-driven.

Key Decisions for Investors

• Establish a short BP PLC equity position (BP.L) equal to 1–3% of portfolio or buy 3‑month BP puts 10% OTM within 5 trading days to capture near-term downside from suspended buybacks and inventory losses; trim/close before Meg O’Neill’s April investor day or if net debt drops below $18bn.
• Allocate 2% of portfolio to BP senior 3–5 year bonds (or equivalent bond ETFs) if yields exceed 4.5% or spread pickup >100bp vs iTraxx Main, holding 12–36 months to play balance-sheet repair and disposal proceeds reducing credit risk.
• Implement a relative-value pair: long Exxon Mobil (XOM) 1–2% vs short BP (BP.L) 1–2% for a 3–12 month horizon, expecting investors to favor firms maintaining buybacks and clearer return profiles.
• Adopt a staged contrarian accumulation: build a 1–2% long BP equity position only on pullbacks >=15% from today, horizon 12–24 months, as a play on successful $20bn disposals and upside from Bumerangue conversion; size small pending disposal execution milestones.