BP Q1 2026 Earnings Call - Navigating Middle East Volatility and Aggressive Debt Reduction

Craig, Moderator/Host, BP: Hello everyone, and thanks for your interest in BP’s first quarter 2026 results. Today’s video features Meg O’Neill, Chief Executive Officer, and Kate Thomson, Chief Financial Officer. Before I hand over to Meg, I’d like to draw your attention to our cautionary statement. In this video, we will make forward-looking statements that refer to our estimates, plans, and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement, and SEC filings for more details. These documents are available on our website. With that, over to you, Meg.

Meg O’Neill, Chief Executive Officer, BP: Thanks, Craig. It’s an honor and a privilege to be here today as BP’s CEO. I have a deep respect for BP, its history, global reach, and long-standing partnerships. This is a company with real scale, optionality, and significant opportunity. It has a strong portfolio of assets and a depth of capability across the organization. As for me, I’ve been in the energy business for 30 years. I love what I do, and I’m passionate about our work. Our industry underpins economic growth, human development, and so much of everyday life. We play a vital role in supplying customers across the world with the energy they need to help them thrive. Right now, we’re operating in an environment of significant complexity: geopolitical tension, supply disruption, rapid technological change, and shifting global energy demand. Energy has rarely been more central to the world’s concerns.

The teams across BP are playing their part to keep oil, gas, and refined products flowing during an incredibly challenging time, focused on maintaining safe, reliable, cost-efficient operations. I’m encouraged by what I’ve already seen across the business, strong technical expertise, a deep commitment to safety, and a clear understanding of the need to deliver operational excellence and competitive returns through the cycle. Execution and consistency will be critical in realizing our potential. I see a real opportunity at BP to build on the strong progress made in 2025 and to do so in a focused and disciplined way. I’ll come back to that in my closing remarks and give you some thoughts as we look ahead. I would also like to offer my personal thanks to Carol for her leadership in ensuring continued momentum in recent months.

First, let me hand over to Kate to talk through the first quarter results.

Kate Thomson, Chief Financial Officer, BP: Thank you, Meg, and let me say on behalf of the whole BP team, a very warm welcome to you. I’m very much looking forward to working together with you in the months and years to come. Let me start with some comments on the situation in the Middle East, where the safety and well-being of our people in the region continues to be our main priority. Our business response teams are supporting our personnel in the region and helping to manage any disruptions to the business and will continue to monitor developments very closely. Reflecting on the price environment, events in the Middle East and the ensuing impacts on key global supply routes drove heightened volatility across crude oil, natural gas, and refined products in the latter part of the quarter. Crude oil prices increased sharply in March, with average Brent prices up almost 50% versus February.

International gas prices also rose sharply, including in Europe and Asia, with March average UK NBP and JKM up around 65% and 70% respectively versus February. In the US, other than a price spike during Winter Storm Fern, Henry Hub prices were much more stable, averaging $3.50 per MMBTU in the quarter. Our Refining Indicator Margin moved significantly higher towards the end of the quarter. These events serve to demonstrate why our integrated model matters. When conditions tighten and flows shift quickly, our ability to act as one system across the value chain helps us to respond promptly to enable energy to flow to our customers. I’ll come back to talk through the operational and financial implication of these events shortly. Turning to performance in the first quarter, where we have delivered strong operational and financial results.

Reported upstream production was resilient at 2.3 million barrels of oil equivalent per day. This was supported by continued high plant reliability, higher production in the Gulf of Mexico, and strong performance in BPX, offsetting disruptions in the Middle East and some divestment impacts. For the fifth consecutive quarter, refining availability was above our target of 96%. Refining throughput was over 1.5 million barrels per day, our highest quarterly figure in 4 years. We also made progress in simplifying our portfolio with the agreed sale of the Gelsenkirchen refinery announced in March. Once complete, this will further increase our structural cost reduction target to $6.5 billion-$7.5 billion by 2027.

This all supported delivery of our $3.2 billion of underlying net income, significantly higher than the fourth quarter, and $8.9 billion of operating cash flow before a working capital build of $6 billion. Today, we are announcing a dividend per ordinary share of $0.0832. Looking at the income statement in detail. Group underlying earnings increased quarter-on-quarter, primarily driven by stronger performance in Customers & Products. Turning to the segments in more detail. In Gas & Low Carbon Energy, the underlying result of $1.3 billion compared to $1.4 billion in the fourth quarter. This reflects broadly flat realizations and an average gas marketing and trading results contribution. When compared to our published rules of thumb, we saw an adverse impact of around $200 million from price lags.

In Oil Production & Operations, the underlying result of $2 billion is flat compared to the fourth quarter. This reflects the divestment of Coleen in the North Sea, offset by higher realizations. When compared to our published rule of thumb, there is an adverse impact of around $700 million from price lags. Looking ahead, realization of the price lags experienced in the first quarter will be subject to future volume and prices. Turning to Customers & Products. The underlying result was around $1.9 billion higher than the previous quarter. At the business level in Customers, the underlying result of $1 billion compared to $900 million in the fourth quarter. This reflects seasonally lower volumes and lower retail fuels margins.

These were more than offset by a higher midstream performance, with our integrated value chain enabling greater flexibility in sourcing and routing volumes to capture value, one-off timing effects, and a lower underlying operating expenditure. In products, the underlying result was $2.2 billion compared to $500 million in the fourth quarter. The improvement in earnings reflect higher realized refining margins, higher throughput, and crude selection timing effects. The oil trading contribution was exceptional. As always, trading results will vary quarter to quarter. Our focus remains on capturing value through the cycle while operating within a clearly defined risk framework. Taking all these factors together, group underlying replacement cost profit before interest and tax was $6.3 billion compared to $4.4 billion in the previous quarter. Below the operating segments, underlying finance costs were around $1 billion.

The underlying effective tax rate in the first quarter was 32% compared to 43% for the previous quarter, reflecting changes in the geographical mix of profits. Non-controlling interests were around $370 million. This is higher than the fourth quarter, reflecting the business results where we do not own a hundred percent. Group underlying replacement cost profit was $3.2 billion, and we recorded around $2.5 billion of adverse adjusting items across the segments, including post-tax net impairments of around $400 million. After inventory holding gains of $3.2 billion, we reported first quarter IFRS profit of $3.8 billion. Moving to cash flow and the balance sheet.

Operating cash flow was $2.9 billion compared to $7.6 billion in the fourth quarter after a working capital build of $6 billion. Excluding the impact of working capital movements, our adjusted operating cash flow was $8.9 billion compared to $6.7 billion in the previous quarter, reflecting improved cash conversion quarter-on-quarter. Given the significant working capital build this quarter, let me comment on the key moving parts. $4.1 billion reflected seasonal working capital effects. For example, inventory builds across our downstream businesses ahead of the anticipated seasonal increase in demand and higher levels of inventory in transit. It also includes a significant build as a result of the rising price environment.

We expect around half of this $4.1 billion to unwind over the remainder of the year, with the majority over the next two quarters. The unwind of the other half will depend on how the Middle East situation evolves. $1.1 billion related to the timing of payments, and these are expected to reverse over the normal course of business through the year. $800 million of other items, primarily related to the Gulf of Mexico settlement payments, which do not reverse. With a number of big moving parts, let me share a few words on how our sources and uses of cash have flowed through to net debt this quarter. Operating cash flow was $2.9 billion.

CapEx in the quarter was $3.3 billion, and full year CapEx guidance remains in the range of $13 billion-$13.5 billion. Shareholder distributions in the quarter were $1.8 billion, including around $500 million for completing the share buyback program announced in November 2025. As a reminder, and as announced in February, share buybacks have been suspended. We made $1 billion of payments related to lease liabilities and hybrid bonds. Taken together, our net debt increased by around $3 billion to end the quarter at $25.3 billion. Looking ahead, we have confidence in the plan and our path to reduce net debt through continued strong operational performance across our businesses driving cash flow growth.

Proceeds from our divestment program, including around $6 billion from the announced Castrol transaction, the unwind of working capital, and the allocation of all excess cash to the balance sheet. In addition, we’ve announced today, subject to market conditions, our plan to reduce our hybrid corporate bond financing by around $4.3 billion by the end of 2027. This is from today’s balance of $13.3 billion, made up of a core stack of around $12 billion and another $1.3 billion issued as pre-financing.

Following completion of these actions, the remaining $9 billion of corporate hybrid bonds is intended to remain a permanent component of BP’s capital structure. Including the planned redemption of hybrid bonds, we expect net debt and financial obligations and instruments to reduce in the second half of 2026, and we’re confident on delivery of our 2027 net debt target. Before moving to guidance, let me come back to the situation in the Middle East and how to think about implications to BP’s earnings. Starting with operations, on average, we have exported around 100,000 barrels per day of our Middle East liftings via the Strait of Hormuz, including the barrels from Iraq and a portion of Abu Dhabi onshore. The balance of our Abu Dhabi production entitlement has typically been lifted from the Fujairah terminal.

For LNG, around 5%-10% of our portfolio has been sourced from the Middle East region. Our supply, trading, and shipping team are working with our customers to manage the impacts of the current supply disruptions. In refining, although we have no direct exposure to operations in the Middle East, we are focused on running our North American and European assets safely. Across our fuels businesses, we’re working hard to meet customer demand. From a value perspective, in the upstream, the heightened volatility is leading to notable differences between market prices used in our rules of thumb and realized prices due to price lags, price caps, timing of liftings, and contract structures. An example is sales in the Gulf of Mexico, which are priced on a one-month lag. March prices will be captured in second quarter results.

There will also be other factors in the second quarter affecting realizations, including the WTI Brent differential. In refining, we are seeing margin dislocations driven by three main factors, crude differentials, product yields, and freight costs. Assuming current conditions persist, we could expect the difference between our Refining Indicator Margin and our realized margin to be greater than $5 per barrel, but this is subject to how the situation unfolds. We will continue to monitor developments across commodity markets, work with our partners, and assess implications for our businesses and plan. As usual, we’ll provide an update on our realizations and production through our quarterly trading statement. Looking ahead to the second quarter and compared to the first quarter, we expect reported upstream production to be lower due to seasonal maintenance in the Gulf of Mexico and the effects of disruption in the Middle East.

The heightened volatility in the oil and gas prices could also impact PSA contracts. In Customers, we expect seasonally higher volumes to be more than offset by a lower midstream result, including the potential reversal of the 1Q timing effect. We also expect volumes and fuels margins to remain sensitive to conditions and developments in the Middle East. In Products, refining throughput is expected to be impacted by a higher level of planned turnaround. We also expect lower throughput at Whiting due to a third-party event this month, which has now been resolved. Refining margins are expected to remain sensitive to the cost of supply and conditions in the Middle East. We now expect to reduce our hybrid capital through the redemption without replacement of the EUR 2.5 billion perpetual hybrid.

Looking to the full year 2026, we now expect full-year reported upstream production to be lower due to the effects of the Middle East disruption. All other full-year guidance remains unchanged, and we remain resolute on the importance of maintaining capital discipline. Importantly, as outlined at our full-year results in February, excess cash will be fully allocated to accelerate the strengthening of our balance sheet. In summary, as I reflect on another strong quarter, we are building momentum. We are delivering on our financial plan, all in support of our strategy. Our assets continue to run well, underpinning strong earnings and cash flow delivery. We’re continuing to high-grade our portfolio, and we’re taking action to reduce our cost base, which we’ll update on further at our second quarter results. We remain on track to deliver our key targets by the end of 2027.

With that, I’ll hand back to Meg for some closing remarks. Meg.

Meg O’Neill, Chief Executive Officer, BP: Thanks, Kate. This has been another strong quarter for BP, despite a lot of external volatility. Our operations continue to perform well. We have kept momentum going in our financial performance and are headed in the right direction. My immediate priority is to accelerate our progress, keeping a tight focus on safety, operational performance, and capital discipline. We need to continue to strengthen the balance sheet and remain disciplined in our spending and our investment, and in doing so, build a more resilient BP. We must also capitalize on the tremendous opportunity that exists across our portfolio to unlock growth and drive improved returns. This includes our world-class upstream assets in some of the best basins in the world. We have a high-quality pipeline of major projects that we are developing today and others that represent untapped potential for the future.

This will require discipline to enable us to invest in the highest returning assets that will create durable cash flows, increasing returns, and driving long-term value. We have a critical role to maximize returns for our shareholders and to work safely and responsibly with communities and with partners and customers. I look forward to continuing to meet many of our shareholders and external stakeholders over the coming weeks and months. I will also be out across the business, meeting our operational leaders and frontline teams, understanding our assets, and reinforcing our strategic priorities at every level of the organization. I have announced the intention to organize BP with a defined upstream and downstream. This change will enable us to reset ways of working and ensure that accountability sits in the right place and simplifies decision-making, empowering the BP team. We’ll keep you updated as we make progress on this.

From the front line to leadership, I want us to be rigorous in our decision making, clear and consistent in how we communicate, and always learning, always pushing ourselves to be better. That’s how we simplify BP and deliver safely and reliably, maximize returns, compete to win, and realize BP’s full potential. BP is a great company built on the strength of remarkable people and world-class assets. Our next chapter will be as a simpler, stronger, and more valuable company, and I’m really excited about the opportunity ahead of us. Thank you.