BP (LON: BP) (NYSE: BP) received a rating downgrade from TD Cowen, which cut its rating to Hold from Buy, reducing its price target from $40 to $36.

The downgrade is driven by concerns over BP's high exposure to lower netback regions, reliance on divestments for debt reduction, and fixed cash obligations impacting shareholder returns.

Key Factors Behind the Downgrade

1. Rising Debt and Limited Shareholder Returns

• BP's net debt is projected to increase by $2 billion in 2025 due to share buybacks.
• Annual debt increase of $0.5 billion through 2028 is expected if buybacks remain at the lower end of BP's 30-40% cash flow from operations (CFO) target.
• The company aims to reduce its $20 billion debt to $14-18 billion but relies on executing its $20 billion divestment target to achieve this.

2. Challenges in BP's Upstream Business

• Limited upstream production growth until late 2020s, with major Gulf of Mexico projects coming online later.
• Production growth to 2027 is estimated to be 5% below the peer average due to BP's positions in the Middle East and equity affiliates.

3. Fixed Cash Obligations Weigh on Flexibility

• Macondo payments, leases, and hybrid debt service will consume approximately 25% of CFO in 2025, compared to a peer average of just 6%.
• This significantly limits BP's ability to enhance shareholder returns through increased buybacks or dividends.

Potential Upside: BP's Strategic Shift

Despite the downgrade, TD Cowen acknowledges that BP's updated strategy, which focuses on:

• Reducing renewables spending
• Improving operational efficiency

…could improve its long-term competitive position.

Investment Implications

• BP's reliance on asset sales to manage debt poses a risk if it fails to meet divestment targets.
• Upstream growth remains a concern, with a production gap compared to peers until at least 2027.
• Shareholder returns could be constrained due to high fixed cash obligations.

Tracking BP's Financial Position

• Balance Sheet Statements API
  Monitor BP's debt levels and cash flow trends.

• Company Rating API
  Track changes in BP's financial health and market outlook.

Conclusion

TD Cowen's downgrade reflects concerns about BP's financial flexibility and limited shareholder returns due to high cash obligations and a slow upstream growth trajectory. While a strategic shift could offer long-term benefits, the near-term outlook suggests pressures on cash flow and debt management.

For investors, BP's execution on asset sales and operational improvements will be key in determining future stock performance.