Overview
BP said on Tuesday that a recent rally in energy prices, together with stronger refining margins and solid oil trading, should boost its second-quarter earnings. The company also warned that the quarter will include around $1 billion of impairments, mainly associated with its lower-carbon energy transition businesses, without providing further detail on the specific assets affected.
Drivers of the earnings uplift
BP quantified the expected benefits from the price rally across several parts of its business. The company said stronger oil and gas prices should add between $1.8 billion and $2.1 billion to earnings in its oil production and operations business versus the first quarter. Its gas and low-carbon energy segment is expected to gain a further $500 million to $700 million.
In addition, BP said improved refining margins should lift earnings in its products business by $1.2 billion to $1.4 billion. The company expects its oil trading result to be slightly higher than the previous quarter, which was exceptionally strong.
Market context
BP linked the price strength to the U.S.-Israeli war on Iran, noting that the conflict led to Iran effectively closing the Strait of Hormuz, disrupting global supply and pushing crude and gas prices to multi-year highs. On that basis, global benchmark Brent crude averaged around $97 per barrel in the April-to-June quarter, up from about $78 in the first quarter and roughly $67 a year earlier.
Output and debt metrics
Despite the price tailwind, BP expects upstream production to decline in the second quarter to between 2.17 million and 2.22 million barrels of oil equivalent per day, down from roughly 2.34 million boed in the prior three months. The company attributed the reduction in part to effects of the crisis.
On balance sheet metrics, BP said net debt stood at $22 billion to $23 billion at the end of June, down from $25.3 billion at the end of March. The company reiterated a target to reduce net debt further to $14 billion to $18 billion by the end of next year.
BP made a $2.9 billion payment to redeem e2 82 ac2.5 billion of perpetual hybrid bonds, which leaves it with about $13 billion of such bonds outstanding. It also disbursed $1.1 billion to cover Gulf of Mexico settlement liabilities. Overall, BP said net debt, hybrid bonds and Gulf of Mexico settlement liabilities should fall by about $6.3 billion to $7.3 billion from the previous quarter.
Impairments and write-offs
Alongside the earnings uplift, BP flagged roughly $1 billion of impairments for the quarter, primarily tied to its lower-carbon energy transition businesses. The company did not disclose a breakdown of that figure when announcing the update.
RBC analysts commented on the impairment, saying, "We believe both LightsourceBP and Archaea could face the chopping block (although not formally announced by the company as far) and see no place for either in BPs portfolio long term."
BP also signalled exploration write-offs of about $500 million in the second quarter, mainly related to the sale of its stake in the Bay du Nord project offshore Canada.
Market reaction and analyst response
The quarterly trading statement prompted Citi to raise its second-quarter earnings-per-share forecast for BP by 18 percent. BP shares were up 2 percent by 1222 GMT on the trading update, compared with a 1.1 percent gain in the wider European energy sector during the same interval.
Takeaway
BP expects the recent surge in energy prices and stronger refining margins to meaningfully bolster second-quarter earnings across multiple segments, while also recording impairments and exploration write-offs tied to its transition portfolio and asset sales. The company has reduced net debt since March and signalled a plan to take it lower over the coming year, even after notable cash outflows for bond redemptions and settlement liabilities.
Note: The company provided the financial impacts and ranges cited above; BP did not release further line-item detail in this update.