British oil giant BP (BP, Financial) is maintaining its quarterly share buyback pace of $1.75 billion through borrowing, despite significant pressure on its balance sheet from weak oil prices. However, with persistently low international oil prices and declining refining margins, BP may reduce its share buyback target by February next year. The company reported a substantial increase in net debt by $1.7 billion in the third quarter, reaching $24.27 billion, the highest since early 2022.
BP's strategy of relying on borrowing to uphold investor returns has led to this considerable rise in net debt. Although the company has temporarily sustained its share buyback scale through loans, it indicated that changes might occur by February when it updates its strategic and financial guidance.
In its latest earnings report, BP kicked off the earnings season for major oil companies like Shell and ExxonMobil. BP's adjusted net profit for the third quarter was approximately $2.27 billion, exceeding analysts' expectations but falling short of the $2.76 billion recorded in the previous quarter and $3.29 billion from the same period last year. Recent years saw skyrocketing oil and gas prices boosting both stock prices and profits for energy giants, leading to increased scale in share buybacks.
However, this trend reversed this year as global demand weakened and the energy transition trend continued, causing significant profit declines for BP, Shell, and ExxonMobil. These companies still face intense pressure to continue rewarding investors. Over the years, investors have criticized oil giants for being too stingy in shareholder returns, but this sentiment improved as share buyback scales surged in 2023.
BP's profits have consistently declined due to falling crude and refined fuel prices. Analysts expect BP to review its $7 billion share buyback guidance for 2025 during its capital markets day next February, given the weak global economic outlook, rising net debt, and ongoing softness in oil and refining sectors.
Following the release of weak financial data and a statement about potential changes to next year's share buyback scale, BP's stock fell more than 1%. So far in 2024, BP's stock has dropped over 15%, while oil prices have fallen about 7% during the same period.
Looking ahead, international oil prices could continue to decline. The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) predict a significant "supply surplus" in the oil market by 2025, prompting a shift away from previously optimistic demand forecasts. Goldman Sachs even predicts that Brent crude prices could hit a low of $61 per barrel.
In addition to the impact of declining crude prices, BP's profit margins are also negatively affected by the drop in refined fuel margins. The company expects these margins to remain low in the fourth quarter.
