(The opinions expressed here are those of the author, a

columnist for Reuters.)

*

BP's net debt reached $27 billion by end of Q1

*

CEO aims to reduce net debt to $14-$18 billion by 2027

*

Shares have underperformed rivals since strategy reset in

February

By Ron Bousso

LONDON, June 3 - BP has jumped from crisis to crisis in

recent years, severely eroding the British firm's stature as one

of the world's leading oil companies. Given the increasingly

challenging dynamics in today's oil market, BP may finally need

to accept that it is no longer a true oil major and can't keep

managing cash like one.

The exclusive Big Oil club of Exxon Mobil ( XOM ), Chevron ( CVX )

, Shell, TotalEnergies and BP

has for decades been synonymous with sprawling upstream and

downstream oil and gas operations, solid balance sheets and

long-term strategies that have helped generate sizeable, stable

shareholder returns.

But BP hasn't ticked most of these boxes for years, having dealt

with a succession of crises over the past 15 years that have

slashed its market cap and left it financially vulnerable and

lacking clear strategic direction. Most recently, a failed foray

into renewables and a management scandal saddled the company

with a ballooning debt pile as it struggles to revert back to

oil and gas.

CEO Murray Auchincloss acknowledged the need for change when he

unveiled in February a fundamental strategy reset that includes

reducing spending to below $15 billion to 2027, cutting up to $5

billion in costs and selling $20 billion of assets in an effort

to boost performance and rein in ballooning debt. The plan also

reset the rate of shareholder returns to 30-40% of operating

cash flow.

But the reset has done little to alleviate investor

concerns. BP's shares have declined by 18% since the strategy

update, underperforming rivals.

Piling on the pressure, activist shareholder Elliott Management,

which has recently built a 5% position in the company, has

indicated it wants BP to cut spending even more.

There is, therefore, clearly a need for deeper change.

CHANGE OF GUARD

While it may be challenging for the 116-year-old company to

admit that it can no longer carry the same financial heft it

once did, accepting reality will offer the company's leadership

an opportunity to reduce some of its commitments to investors,

particularly its share repurchase programme.

All energy majors today have multi-billion-dollar buyback

programmes that send capital back to shareholders, helping to

attract investors who may be wary about the future of fossil

fuel demand.

But BP's buybacks feel like a luxury that is out of synch

with its financial woes.

In its first quarter results released in February, BP said

it would buy back $750 million over the following three months.

That was lower than the $1.75 billion in the previous three

months, but even at this reduced rate, this would still total $3

billion per year.

That doesn't seem prudent, especially given the 20% drop in oil

prices to around $65 a barrel this year and the darkening

economic outlook.

Auchincloss' financial objectives assume a Brent oil price

of $70, meaning the Canadian CEO will most likely struggle to

meet his targets without borrowing further.

DEFINE DEBT

Removing the annual $3 billion buyback would certainly upset

investors, but it would go a long way towards reducing BP's net

debt to between $14 and $18 billion by 2027, compared with $27

billion at the end of March 2025.

The "ground zero" of BP's financial decline was the deadly 2010

Deepwater Horizon disaster in the Gulf of Mexico, which

generated $69 billion in clean-up and legal costs. The company

continues to pay out over $1 billion per year in settlements.

The financial shock forced BP to sell billions of dollars of

assets and issue huge amounts of debt to foot the bill. Its

market value dropped to around $77 billion today compared to

$180 billion in 2010.

BP's debt-to-capitalization ratio, known as gearing, reached

25.7% at the end of the first quarter of 2025, significantly

higher than those of other oil majors, including Shell's 19% or

Chevron's ( CVX ) 14%.

And, importantly, BP's current $27 billion net debt figure

omits several major liabilities held on its books. This includes

$17 billion in hybrid bonds, an instrument that has qualities of

both equity and debt, including a coupon that must be paid or

accrued. While companies may issue hybrids for many reasons,

including maintaining flexibility, they often do so in part

because rating agencies do not treat hybrids as regular debt,

which flatters the issuer's leverage ratios.

Anish Kapadia, director of energy at Palissy Advisors,

calculated BP's adjusted net debt hit $86 billion at the end of

the first quarter of 2025, when including net debt, hybrids,

Gulf of Mexico liabilities, leases and other provisions.

Ultimately, cutting the buybacks should enable BP to tame its

huge debt pile and repair its balance sheet faster. That, in

turn, should create a strong foundation for rebuilding investor

confidence.

The departure of current BP Chairman Helge Lund in the

coming months could be a good opportunity for the company to

consider such radical change. It's unclear who will take this

job, but one qualification for whoever succeeds Lund should be a

much-needed sense of financial realism.

Want to receive my column in your inbox every Thursday, along

with additional energy insights and trending stories? Sign up

for my Power Up newsletter here.