Earnings Call Transcript - BP Q4 2025

Operator, Operator

Good afternoon and good morning, everyone, and thank you for your interest in BP's Full Year 2025 results. I'm delighted to welcome our guests in the room and those on the webcast. I'm joined today by Carol Howle, Interim Chief Executive Officer; Kate Thomson, Chief Financial Officer; and Gordon Birrell, Executive Vice President, Production and Operations. Before I hand over to Carol, let me draw your attention to our cautionary statement. In this presentation, 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. And with that, over to you, Carol.

Carol Howle, Interim CEO

Thank you, Craig, and it's a real privilege to be here as Interim CEO ahead of Meg O'Neill's arrival as Chief Executive Officer at the beginning of April. On behalf of the entire BP team, I want to take this opportunity to thank Murray for his 34 years of service, leadership, and contributions to the company. As we started 2025, it was clear to us that this was a year of turnaround. We hadn't been performing as strongly as we should have been, and that required urgent and focused intervention. We have made good progress in 2025 to address that. Kate, Gordon, and I will spend around 30 minutes talking through our performance highlights and delivery of our plan. We know we've got more to do to accelerate the delivery and position the company for the future opportunities we have ahead of us. The team and I have great conviction in our potential to deliver significant growth in shareholder value. From my 25 years in BP, I know we have fantastic assets and exceptional people. Our strategic direction is right. We've made a good start in delivering against the plan we laid out 12 months ago, and I want to thank everyone at BP for that delivery. We look forward to Meg joining in April; she's an outstanding leader. Together, as a leadership team, we're going to continue to drive forward our strategy in accelerating the turnaround of this great company. Now Kate will run through some of the highlights. So I'll recap a few of them. Our operational performance was strong across the group. Reported upstream production was lower than 2024, which reflected portfolio changes, but underlying production was held broadly flat, and we've exceeded our annual guidance from 12 months ago. We set new records in upstream plant reliability and refinery availability with both above 96% for the year. We started up seven major projects, and our reserves replacement ratio was 90%, up from an average of around 50% in the previous two years. Based on provisional data, our operational emissions in 2025 were 37% less than in 2019, a reduction well in excess of our 20% target. Our supply trading and shipping business remains a distinctive competitive advantage for BP, delivering an average uplift of around 4% to BP's returns, which extends over the past six years. We concluded the strategic review of Castrol with an agreement to sell a 65% shareholding, and we believe this transaction represents a very good outcome for shareholders. It allows us to realize value today while continuing to benefit from future growth of that business. In one year, we've completed and announced over $11 billion of our $20 billion divestment program. Let me now turn to safety, our number one priority. Our commitment to our safety goals is unwavering. It's to eliminate fatalities, life-changing injuries, and Tier 1 process safety events across our operations. Tragically, in 2025, four colleagues lost their lives while working in our U.S. retail business. Our thoughts remain with the families, friends, and colleagues of the four people who lost their lives. On process safety, we've seen encouraging progress. Combined Tier 1 and Tier 2 events are down by around one-third compared with the previous year. While process safety has improved, we recognize we have more to do. We must learn from every incident and challenge to keep us safe today and tomorrow. Turning then to our primary targets, where we've made good progress this year. Kate will provide further details on each of them shortly, but the headlines are we increased adjusted free cash flow by around 55% in 2025 on a price-adjusted basis. Net debt was $22.2 billion at the end of last year, which is $800 million lower than at the end of 2024. We've now delivered $2.8 billion of our $4 billion to $5 billion structural cost reduction target since the start of the program, including around $2 billion in 2025. Going forward, we've increased this target to $5.5 billion to $6.5 billion, which includes the expected cost reductions from the divestment of Castrol. Return on average capital employed was around 14% in 2025 on a price-adjusted basis, and that's up from 12% in 2024. We are executing our plan. We're taking decisive action on costs, capital, and portfolio. That, combined with the Board's decision to suspend share buybacks and fully allocate excess cash to the balance sheet, will create a strong platform to invest with discipline into our deep hopper of oil and gas opportunities. In the near term, this is supported by three more major projects that we expect to bring online by the end of 2027 with six more projects sanctioned. We're on track to bring a further eight to ten projects online between 2028 and 2030. As we look to the long term, our success in exploration in 2025 has created a real sense of excitement around the company and opportunities ahead of us, including in the Middle East, Brazil, and Namibia. There's more to come with planned exploration wells this year, including in Libya, Angola, Brazil, and the Gulf of Mexico. We see potential to drive disciplined organic production growth over the longer term underpinned by our distinctive resource hopper and our capability, our people, technology, experience, maximizing value for our shareholders. More on that from Gordon shortly as well as the significant progress being made by the team in the downstream, which I'll cover and come back to later. But for now, let me hand over to Kate.

Katherine Thomson, CFO

Thank you, Carol, and good afternoon, everyone. It's great to see you all here. Thank you for joining us. We covered our fourth quarter and full year results in the video released earlier today at 7:00 a.m. U.K. time. So I'll do a quick recap of the headlines here. We generated underlying replacement cost profit or net income of $7.5 billion in 2025 against the backdrop of a weaker price environment. This result was underpinned by strong operating performance, which Carol already highlighted. Operating cash flow for the year was $24.5 billion, including an adjusted working capital build of $2.9 billion this year. We improved capital efficiency and tightened further our discipline, delivering full year CapEx of $14.5 billion, including a reduction of organic CapEx to $13.6 billion. For 2025, including the fourth quarter dividend announced this morning, shareholder distributions for the year were around 30% of our 2025 operating cash flow and within the guidance issued last February. The guidance for shareholder distributions is now retired, but the dividend remains our first financial priority. We recognized impairments of around $4 billion after tax this quarter. These impairment charges are largely related to our transition businesses, including biogas and renewables, where we took decisive action to manage our pace of growth and to high-grade our portfolio to maximize returns. While these are noncash adjustments in our financial results, we recognize that every impairment reflects a prior capital outlay. We're committed to doing better for our shareholders on capital allocation, driven by a disciplined and rigorous focus on returns as we progress only the best opportunities from our hopper. I would provide more details on the progress we've made on our four primary targets in 2025. We're four quarters into our 12-quarter plan, and we've started, and we are focused on accelerating wherever we can. If I start with adjusted free cash flow, we are progressing ahead of our target for greater than 20% compound annual growth through 2027. On both a reported and a price-adjusted basis, we generated around $13 billion of adjusted free cash flow. Our targets are presented on $70 per barrel at 2024. On a price-adjusted basis, this represents around a 55% growth from last year. This achievement was supported by interventions made on CapEx, the significant improvement in downstream operating cash flow generation, and good progress in upstream. Moving on to return on capital employed. On a price-adjusted basis, return on average capital employed increased from around 12% in 2024 to around 14% in 2025. We remain confident in achieving our price-adjusted target of over 16% in 2027. Moving to costs, we are fundamentally shifting the cost performance culture right across the organization to safely achieve top quartile wherever possible. In 2025, we delivered around $2 billion of reductions, a material step-up from 2024. This brings cumulative reductions to $2.8 billion to date. That's equivalent to around 60% of our $4 billion to $5 billion target by 2027 versus the 2023 baseline. Reflecting the recently announced outcome of the Castrol strategic review, we now expect to deliver structural cost reductions of $5.5 billion to $6.5 billion by 2027. This doesn't include any expected additional savings from the intended sale of our Gelsenkirchen refinery. Importantly, our cost reductions have more than offset around $2 billion of costs related to growing our business and environmental factors such as inflation, resulting in underlying operating expenditure reduced by over $700 million since 2023. Looking ahead, we plan to deliver a further $1.2 billion to $2.2 billion of structural cost reductions. After taking account of an assumption for inflation and growth costs, we expect to see an acceleration in the reduction of our underlying operating expenditures from now through to 2027. Taken together, this means underlying operating expenditure could reduce to around $19 billion to $20 billion by 2027. Based on cost benchmarking and competitive analysis, we believe we're making good progress. We're ahead of plan in some areas behind in others, but overall on track. In Oil and Gas, the business has maintained its top quartile cost position, keeping unit production costs at around $6 per barrel on average over the last four years. This is supported by the delivery of around $600 million of structural cost reductions in 2025, offsetting inflationary pressures and business growth costs. Not all of our operated regions rank us top quartile on cost, and we are in action to safely address this. In customers, over the last four years, our cost performance benchmarked in the middle to lower quartile range. As a result, we laid out a target at the CMU to lower our total cash cost to gross margin ratio by over 10 percentage points by 2027, and we are now halfway there. We delivered $700 million of structural cost reductions, which contributed to this improvement. We believe this brings us up to the higher end of the second quartile, and we are in action to be firmly within the top quartile by 2027. Turning to areas of our business where we have more to do to safely reduce our cost base. In refining, we have a target of sustainably reducing our cash breakeven by $3 per barrel by 2027. That's equivalent to around $1.5 billion of additional cash flow. This year, we delivered around 80% of our cash breakeven target, mostly through commercial optimization and improved availability. Structural cost reductions also contributed around $300 million this year, driven primarily by optimization of maintenance and supply chain efficiencies. We need to continue to safely lower costs to improve our competitive positioning and underpin our aim of being first quartile margin per barrel and second quartile refining cost per barrel in 2027. Within group central functions, our 2025 cost base needs to improve to reach top quartile. We are already in action with an 8% reduction in 2025 through initiatives such as reducing headcount in higher-cost locations, leveraging strategic third-party partnerships, and simplifying processes and driving digital efficiencies throughout the businesses. We expect to see the contribution from these actions increasingly show up in our 2026 results, and we are working to drive to top quartile on average across our functions. Turning next to our target to strengthen the balance sheet. This is key to enabling us to manage and grow the business through the commodity cycle. We continue to target net debt to be in the range of $14 billion to $18 billion by the end of 2027 and have visibility to moving into that range with the expected closing of the Castrol transaction. In 2025, operating cash flow and divestment and other proceeds were $30.4 billion. After paying $1.2 billion towards the Gulf of America settlement liability accounted for in our working capital. Our uses of cash, including $1.2 billion to redeem hybrid bonds, came to $29.6 billion. So overall, this led to an $800 million reduction in our net debt. As we look ahead, we are seeking to accelerate the strengthening of our balance sheet, not only to allow us to more easily tolerate commodity cycles but also to drive higher free cash flow for our shareholders. We look beyond financing debt when considering our capital structure. We also consider financial obligations, including hybrid bonds, leases and Gulf of America settlement liabilities, which at the end of 2025 added up to around $58 billion. Looking ahead, and as we consider sources and uses of cash, out of the $20 billion divestment program announced last February, we've received $5.3 billion in 2025. The remaining $15 billion is underpinned by the anticipated proceeds from the Castrol transaction and a deep hopper of quality assets that we continuously high-grade. In 2026, we expect this to result in another $3 billion to $4 billion of divestment proceeds. All proceeds in 2026 are expected to be heavily weighted to the second half of the year. Turning now to uses of cash, and I'll start with dividends, our first financial priority. You can expect these to increase by at least 4% per year. Today, we announced a dividend per ordinary share of $0.0832. We continue to pay down the Gulf of America settlement liability through to the end of 2033, but the liability is largely settled by the end of 2032. In 2026, our gross payment is around $1.6 billion and in 2027, around $1.2 billion. After adjusting for changes related to tax amounts, the net liability is expected to be around $4 billion in 2027. We also continue to manage leases, hybrids, and finance debt to optimize finance costs. Leases give us flexibility concerning assets we choose not to own directly. Regarding hybrids under the S&P rules, we currently receive 50% equity treatment for the $12 billion issued during COVID in 2020. Within these rules, we can reduce the stack by up to 10% in any one year, up to a cumulative reduction of 25%. We intend to remain within these limits while continuing to manage maturities proactively. Moving on to CapEx. We have exercised discipline in capital allocation, investing in only the highest returning opportunities across the portfolio and pacing investment more deliberately. We've tightened our 2026 CapEx range to a range of $13 billion to $13.5 billion, and that's at the low end of the range we previously guided through to 2027. Spending this year will be slightly weighted to the first half. All these actions, together with the Board's decision to suspend share buybacks and fully allocate excess cash to the balance sheet, are in service of optimizing finance costs and accelerating the improvement in free cash flow. Let me now hand over to Gordon.

Gordon Birrell, Executive Vice President, Production and Operations

Thanks, Kate. I'd like to spend a few minutes walking through the progress we've made in safely growing the Upstream over the past year. 2025 was a strong year for project execution as we started seven major projects out of the ten we expect to bring online between 2025 and 2027. Five of these were ahead of schedule. We've now started up around 150,000 of the 250,000 barrels of oil equivalent per day net peak production that we expect to have online by 2027. This includes projects such as GTA in Mauritania and Senegal, SIP in Trinidad, and Murlach in the North Sea. Delivering major projects takes focus and drive. We've encountered and overcome challenges in some of our projects along the way. I'm extremely proud that according to the latest IPA benchmarks, we are ranked best-in-class overall for our projects starting up and staying up. Furthermore, of the wells we drill, many as part of major projects, around three-quarters are in the top or second quartile. As mentioned by Carol, based on provisional data, our operational emissions in 2025 were 37% less than in 2019, a reduction well in excess of our target of 20%. Our methane intensity, again based on provisional data, fell to 0.04%, thanks to improved operational performance, significantly below our 2025 target of 0.2%. You also heard from Carol that we had record plant reliability in 2025 of over 96%. We also had wells reliability of almost 98%. We saw strong base delivery, decline management, and turnaround execution with standout examples, including ACG in Azerbaijan and Argos in the Gulf of America. This helped to keep our managed base decline comfortably within the 3% to 5% range. This level of operational delivery is a direct result of the years of investment we've made in world-class capability and cutting-edge technology. This has been a key differentiator for us, and we're not standing still. We're expanding the use of dynamic digital twins, AI, and automation across the business. This includes real-time reservoir wells and facilities monitoring and optimization. These have played a key role in helping to increase BP-operated production on average by around 2% every year for the last five years, while also protecting on average around 4% more from going offline. The delivery of these elements enables us to beat our 2025 production plan. Furthermore, 2026 production, excluding divestments, is now expected to be around 2.3 million barrels of oil equivalent per day, broadly flat compared to 2025. This is an increase compared to the outlook we gave you last year. We're also working hard to strengthen our resource base. Twelve months ago, we set a target to achieve a 100% reserve replacement ratio by the end of 2027 or, said another way, that we'll book around the same amount of proven reserves that we produced. We're making good progress towards that target. As a result of the strong operational delivery and project execution that I just described, in addition to some benefit from higher prices, we have increased our 2025 organic reserve replacement ratio to 90%. We have a high-quality pipeline of major projects due online between 2028 and 2030, including Kaskida and Tiber-Guadalupe in the Gulf of America, Shah Deniz Compression in Azerbaijan, and Tangguh UCC in Indonesia. These four projects alone are expected to add another 250,000 barrels of oil equivalent per day of higher-margin net peak production. I'm particularly proud of our exceptional year for exploration with twelve discoveries in 2025, including in the Gulf of America, Namibia, and Brazil. When asked what's behind our exploration success, my response is that it is a blend of a deeply experienced exploration team and application of advanced technology. We have examples where the combination of seismic technology with high-powered computing and advanced algorithms has enabled us to create images with unprecedented clarity. Our capability and technology have also been important factors in being selected to help governments develop their discovered resources, such as in Kirkuk in Iraq and Karabagh in Azerbaijan. This combination of our exploration success and discovered resource access is enabling us to reload our resource hopper. Others are also acknowledging the progress we've made to strengthen our resource base. When benchmarked using WoodMac data, we now have the second longest remaining resource life of the majors. In summary, we believe our deep resource base is a real competitive advantage. It creates what we call quality through choice. It provides the potential for long-term organic growth and combined with disciplined investment criteria, enables us to progress the most value-accretive options with the highest returns. Along with our high-quality assets, outstanding capability, and advanced technology, we believe this is distinctive and a key differentiator supporting the BP investment case. I'd like to finish by providing an update on the exciting Bumerangue discovery in Brazil, our largest find in the last 25 years. We're making good progress. The in-situ analysis is materially complete, and our initial estimate is that there are around 8 billion barrels of liquids in place, split roughly 50% oil and 50% condensate. As is normal at this stage, there is a wide range of uncertainty around this estimate. We've appointed senior leadership and are currently working on design concepts, including the potential for an early production system. We're also putting plans in place for an appraisal program, which we expect to start around the end of the year. This will use the Transocean's deepwater Mykonos rig following the drilling of our Tupinamba exploration prospect in a neighboring block. This will provide us with data from locations across the reservoir to enable us to describe the fluid characteristics and resource potential. As you can see, we're in action with confidence, and our excitement for this huge opportunity is growing. With that, I'll hand back to Carol.

Carol Howle, Interim CEO

Thanks, Gordon. Yes, a lot of great progress in the Upstream. It was also a strong year for the Downstream, having delivered a significant step-up in performance. We continue to optimize our cost base safely with around $1.6 billion of structural cost reductions delivered to date. Customers delivered their highest underlying earnings since 2019 with all businesses growing year-on-year. Our approach to investments in our refineries and midstream has created the ability for us to consistently run the kit above 96% and capture that margin. We're also progressing our business improvement plan at TA, and the commercial integration of our BP Bioenergy acquisition is now complete. We're focusing our portfolio on our leading integrated businesses, having announced the sale of Castrol, completed the sale of Netherlands Retail, and we continue to progress the intended sale of our refinery, Gelsenkirchen, and Austria Retail as well. So let me just close now before we turn to questions for the next 45 minutes or so. We've reflected today on where we've come from as a company and the really good progress we've made in 2025. We know we need to accelerate delivery in every dimension of our reset strategy. We are resolute about our focus needs for BP. We need to build on a good year and operate well consistently quarter in, quarter out. We need to accelerate the strengthening of the balance sheet, which includes suspending the buyback and delivering the $20 billion divestment program. Our discipline on capital allocation is key, and we must continue to simplify our portfolio. We've made progress in addressing that in 2025, and it will remain our central focus going forward. We have made good progress on our cost base, and we're in action to take our businesses and functions to the top quartile by the end of 2027. All of this must be in service of materially improving cash flow, returns, and value for our shareholders. As we look ahead, we have a portfolio of world-class assets and the richest set of organic opportunities for growth that we've had in many years. The Board and the leadership team are aligned around our goal to become a simpler, stronger, and more valuable company and in turn, grow shareholder returns. We're in action. We have more to do, and we can and will do better for our shareholders. With that, we go to Q&A.

Operator, Operator

Thank you, Carol, and thanks, everybody, for listening to our remarks. What we're going to do is, as usual, take one question, please, from those in the room and those online. We'll certainly come back to everybody if there's time for an extra question, I can assure you. And we will aim to finish by around 2:30 U.K. time here. So Michele, you are quick off the mark, so we'll turn to you first. If I can just ask everybody to say their name and the company they're with, please. Thank you.

Michele Della Vigna, Analyst

Thank you very much for the wealth of information provided today. I wanted to come back to the finance cost. I think it's very helpful to look at all of the different sources of debt and to lay out the $15 billion reduction. I was wondering what this means in terms of reduction in the actual finance cost by 2027? How much could we expect that to go down by then?

Katherine Thomson, CFO

Yes. Thank you for the question, Michele. I understand, of course, why you're asking that. Look, what we've tried to do today is be utterly transparent on the totality of the financial obligations that we are managing. It underlines the imperative to do something now to strengthen our balance sheet and make a step change in the pace at which we do that in service of growing free cash flow. There are a couple of elements that it's worth just calling out. So the Deepwater Horizon obligation, that is a payment that we will make each year. This year, it's $1.6 billion; next year, it's $1.2 billion, and then it's materially complete by the end of 2032. We turn pretty much to hybrids and debt. We've got a net debt target of 14% to 18%. That is our first priority, and we are determined to deliver that. We've got line of sight to it now. We will be stepping through that as we go through the year and get proceeds in. I'm very cognizant of the S&P limitations on hybrid, the 10% in any one year up to a cumulative of 25%. Having said all of that, I think it's incumbent on us as we have excess cash to make the very best economic decisions in terms of how we deploy that. You can do the rule of thumb based on what you can see our current financing costs are today to have a sense of what a $15 billion total reduction could look like by 2027. The actual reduction will depend on the choices that we make as we deploy that excess cash. This is ultimately about materially changing the total financial obligations we are servicing and, as a consequence, drive higher free cash flow and position us strongly to have the best opportunity to develop the set of organic options that we have ahead of us, which are unique.

Operator, Operator

Thank you, Michele. We'll go to Martijn Rats just in the second row there, please.

Martijn Rats, Analyst

It's Martijn Rats of Morgan Stanley. I want to ask a question about the dividend. The guidance for growth in dividend per share is still 4% plus. But when the buyback was still there, you could say, well, a good couple of points of that actually comes from the share count reduction from the buyback. There is a little bit of an underlying upgrade in the outlook for the total dividend burden of the company. I was wondering if there's a signal in there that there is confidence in the long run? Is that something that I'm interpreting correctly here as in like you could also say that most of the dividend growth actually comes from the buyback share count reduction, yet despite that, we are keeping the dividend growth on track.

Katherine Thomson, CFO

Yes. Mathematically, you could reach the conclusion you've outlined, Martijn, I completely agree with you. I think it's really important we have a progressive dividend, and we've been clear that that's a 4% increase per annum, and the Board is comfortable with that. We want to retain that. That's the first priority in our financial frame. Beyond that, it's about building back the balance sheet and then investing for growth. Yes, the flywheel for share count reduction has changed with the decision around the suspension of the buyback. One of the things that Meg and I will need to step through when she comes in April is to contemplate what sort of balance sheet we want that supports the growth options we have ahead of us, and we'll need to step through that. But for now, the financial framework is clear. The only thing we're altering is we are suspending buybacks and putting all of that excess cash against strengthening our balance sheet. The dividend, the 4% growth per annum, is exactly what we want to maintain right now.

Operator, Operator

I'm going to go over to this side. Chris Kuplent, please.

Christopher Kuplent, Analyst

Chris Kuplent, Bank of America. I've got another one for you, Kate. You showed the performance in 2025 in most respects was well ahead of the targets you laid out 12 months ago. I wonder whether you could talk us through the decision-making tree, why in the end, you decided to suspend the buyback.

Katherine Thomson, CFO

I don't know that it's as complicated as a tree actually, Chris. I think this is just strong financial discipline. Over the last year, we've created a materially different hopper of options in terms of future earnings growth. The right decision now is to strengthen our balance sheet to give us the foundation from which we will access that. It will also create a degree of choice over how much of that we continue to hold as working interest. We have significant growth opportunities in the Paleogene in Brazil, and there are others in Namibia. Currently, we hold Paleogene in Brazil 100%. At some point, we can make choices around how much we may want to dilute. The strength of the balance sheet will allow us to make those choices that will enable us to capture maximum shareholder value. So it's about the right decision now to take action that materially increases the pace at which we strengthen our balance sheet and gives us that foundation for the future.

Operator, Operator

Okay, I'll stay on this side. Doug.

Douglas George Blyth Leggate, Analyst

Thank you. I think folks have flogged the financial question, Kate, a bit. So I will turn to Gordon, if I may. Gordon, you gave a few hints on Bumerangue, obviously. I wonder if I could ask you to give us a few more hints. The recoverable number is pretty critical to the outlook for Bumerangue. You've talked about high-quality rock. Could you give us an idea of what you're thinking and what working interest would you be prepared to go forward with an early production system?

Gordon Birrell, Executive Vice President, Production and Operations

Doug, thanks for the question. Let me take the equity question first. It's early days, and we're in no rush to take a partner. When we do take a partner, it will be the right partner for value and one who can bring something to the table to help us develop this field. We're not providing a recoverable number right now because I'd like to understand a bit more across the reservoir to reduce the range of uncertainty before we publish any more numbers. I remain excited about this. There is nothing I see that has diminished my excitement about this field at 100% with 8 billion barrels in good terms to develop. We're going to do the appraisal program early next year, which will enable us to lock down a development concept by that point. As a reminder of what we put out last year, we have 1,000 meters of hydrocarbon column, 900 condensate and 100 oil. We also mentioned the gradient across the rock was consistent, suggesting it's well connected in the vertical sense, covering about 300 kilometers square. There is reasonable data and analogs out there, but we're not going to put a recoverable number out until we reduce that uncertainty range to something we're more comfortable with. We're comfortable for the moment at 100. We'll find the right partner and come down from there; it's material for our company, and the terms are good. We'll retain a significant proportion of this field.

Operator, Operator

Thank you, Doug. Lydia.

Lydia Rainforth, Analyst

It's Lydia Rainforth from Barclays. I'm going to come back to capital discipline. What's different this time? We've spoken about needing more rigor and diligence, and you've referenced write-downs and impairments. How has anything changed in that capital allocation process?

Carol Howle, Interim CEO

I think let me start on that and see whether you want to jump in, Kate. There has been a cultural shift in cost and discipline in BP. You've seen that from the results from 2025 in terms of the progress around cost reductions. Gordon can give some great examples around the productivity and efficiency gains on the production side. Every dollar has to compete within the portfolio. We're very much focused on that. We're only going to invest in the very best of opportunities. We are holding ourselves accountable to that. Everything needs to compete, and that's why we made some very difficult portfolio decisions last year, and we'll continue to make those right commercial decisions going forward.

Katherine Thomson, CFO

I absolutely agree with you, Carol. As a leadership team, we know how important this is. It's got a huge degree of focus, and we know we need to get this right. You've seen a significant structural shift in our strategy. We went too far, too fast a number of years ago. As we take investment decisions today, we are focused hard on interrogating the level of confidence we have on the returns, testing the downside risk as we take every single investment decision. In time, that will show up with fewer impairments. Of course, you're always going to have impairments driven by the environment around you. I hold those slightly differently to impairments that could be a consequence of capital allocation. However, the impairments we've taken in Q4 resulted from a deliberate decision to tighten the capital we're deploying and the pace at which we're deploying it to maximize returns and shareholder value in terms of cash flow.

Gordon Birrell, Executive Vice President, Production and Operations

Yes, I'll just plug for the teams out there doing it every day. We see tremendous real examples of capital productivity in Azerbaijan and ECG and Atlantis; we’re drilling long undulating horizontal wells with geo-steering, leading to a significant reduction in dollars per rock contacted. In BPX in our Lower 48 business, we have a 20% improvement in completion time, and a 9% improvement in drilling time. In Lower 48, we can unlock the same amount of resources in a year using eight rigs that used to take ten rigs. This is real capital productivity coming through, requiring less capital to hit our targets and allowing us to allocate capital elsewhere. The capital productivity drive we've been on for a number of years is starting to show results.

Operator, Operator

Thanks, Gordon. Moving on to the forward, I'm going to go over to this side of the room. Paul Cheng at Scotia.

Paul Cheng, Analyst

If I could, Kate, on the $5.5 billion to $6.5 billion on the cost reduction target increase, how much does that relate to the sale of the Castrol interest? When you look at your cumulative savings, can you break it down between portfolio impact and actual cost saving?

Katherine Thomson, CFO

Yes. Paul, thank you for your question. In terms of the change in the target, we've added $1.5 billion to the $4 billion to $5 billion just to reflect the transaction on Castrol; hopefully, that's fairly straightforward. Regarding the $2.8 billion we have delivered to date, you may remember, when we set this target out, we anticipated around half of the savings coming from our supply chain and our third-party optimization. That's exactly what I've looked at in the analysis of that $2.8 billion. Half of it came from supply chain and third party, and of the remaining half, it’s been pretty evenly split between organizational optimization and portfolio, so that's the breakdown on the $2.8 billion delivery to date.

Operator, Operator

Thanks, Paul. This side, Alex.

Unknown Analyst, Analyst

My question is about the remaining divestments you have until the end of '27. What are the priorities in terms of assets you want to sell, particularly in the sectors, downstream, or are you counting on the farm down of some of the discoveries in '25 for this target? Can you elaborate on that?

Carol Howle, Interim CEO

When we look at the portfolio, we're focused on the best returns for BP, where could others see more value in certain assets than we do. So we're assessing that comprehensively across upstream, downstream, and low carbon businesses. Currently, we have the Gelsenkirchen refinery in process; we're looking at Austria retail. We have interested parties for Lightsource BP as well. There are certain areas that we’ll consider for potential farm-downs. I don’t think a contingent decision is needed. It's about what’s the right decision for BP, particularly in our position in the Paleogene. We're looking at each specific piece in the portfolio in terms of its value add to BP from a strategic perspective and the value for our shareholders before weighing it up on that basis. Did I miss anything, Kate?

Katherine Thomson, CFO

No, I mean, we'll update you as we go. We have a good hopper in terms of the depth and breadth of quality on assets. So we have plenty of choice and we aren't in a rush. For now, we've stated for this year, three to four typical levels of ongoing high-grading of our portfolio assets. We won't guide in advance where that is likely to originate. We'll make those value-based decisions as we step through them.

Operator, Operator

Okay. Thank you. One more question, yes.

Mark Wilson, Analyst

It's Mark Wilson from Jefferies. It's an interesting setup because by 2027, with your balance sheet down, you should have a concept development for Bumerangue. Does this outweigh all the others? You have two of the twelve total exploration discoveries. Could you give us a pecking order there? Early '27 comes up quickly. Would you be happy to appraise this through '27 at 100% working interest?

Gordon Birrell, Executive Vice President, Production and Operations

Let me just comment on the quality of our hopper. If you look at WoodMac benchmarking, they're using our numbers and methodology, they give us 23 years of production at current levels. We've created that longevity in the company through accessing discovered undeveloped barrels like Karabagh and Kirkuk as well as through the drill bit with Namibia and Brazil. I wouldn't give you a rank order, but clearly, Bumerangue has potential to be very material for our company; it's a country we know well. We're working hard to strengthen our resource base, and Bumerangue is a big part of it. If we have a partner before then that adds value to BP, we'll take a partner. We're in no rush. It must be for value.

Operator, Operator

Thank you, Mark, for your question. We'll go over to the side, Biraj.

Biraj Borkhataria, Analyst

One of the things I am struggling with this morning is reconciling the unchanged net debt target with the buyback cut. You're also cutting CapEx and OpEx. So just trying to understand the moving parts there. I know you're potentially redeeming some of the hybrids, which puts upward pressure on the number. But what about the other moving pieces? Has your view on the ability to sell Lightsource changed? How much equity value is there? There is a lot of debt associated with that. Secondly, could you rationalize why you did a partial sell-down for Castrol rather than the whole thing, which I think was part of the original plan?

Katherine Thomson, CFO

I see that as three questions, so I'll let you off this time, Biraj. First, I'd like to deliver the net debt target and then we'll see. Just to clarify, that is not an automatic trigger for us to reinstate the buyback. We need to take a holistic view of the balance sheet and set ourselves up for the growth we have. On confidence, the results we've printed today show our underlying performance is incredibly strong. This is not a lack of confidence. If anything, I'm more confident in our delivery against our plan than I was a year ago. We're creating the right strength. On Lightsource, we have a number of interested parties looking very hard at it; we’re working through that process, and we will only transact for value, but there's no need to rush. We took our time to evaluate Castrol transactions. It's a great asset and a great business with a future ahead in earnings growth. We came to the conclusion that the transaction with Stonepeak just before Christmas was the right transaction to do. It is an outstanding value decision with good multiples. Retaining the 35% gives us the chance to share in future upside; it is a good outcome for our shareholders.

Operator, Operator

Thanks, Biraj. We'll stay on this side. Irene.

Irene Himona, Analyst

I wanted to ask a question not as Interim CEO but as Head of Trading. When you're adding to the portfolio, things like IKEA, biogas, and Lightsource renewables, you had expressed a vision that by enhancing or adding tradable products, the return from trading would thereby improve. Today, you disclosed a 4% enhancement to group ROACE from trading, which sounds like the top end of the range you had given before, which used to be 2% to 4% or 3% to 4%. I wanted to ask: Is this 4% over the last six years legacy oil and gas? Have these businesses, which you impaired today, made any contribution to that profitability of trading?

Carol Howle, Interim CEO

So we delivered, as you said, 4% from Supply Trading and shipping for the sixth year in a row. That has been consistent through various commodity cycles and different volatility sets. Our competitively advantaged team looks at our BP business from the asset base. We consider what can we optimize and deliver. That is around 2%. We seek around 1% from optimization and 1% from value trading. Within that, we support IKEA around routes to market and the different channels, whether it's into utilities or transport. We have supported working with refineries and with our oil and gas business. What we have seen is a change in the BP portfolio. We have such a rich set of opportunities at levels of return, meaning we must make really difficult choices. That's reflected in the Q4 IKEA impairment as well. We're making challenging choices regarding where to deploy CapEx going forward because we see returns elsewhere. I wouldn't guide on the 4%, but I believe the capability and experience within the team enable us to deliver that across diverse opportunities, and we will optimize the assets BP has and continue to do so.

Operator, Operator

Okay, thanks, Irene. We don't have any further questions online. So we'll stay in the room. Is that Al Syme?

Alastair Syme, Analyst

Can I ask about the Mona project? I understand it's not clear yet, but what is the timeline for moving forward with that development after leaving Morgan? How should we view the financial aspects, especially since you didn't receive anything from the AR7 auction?

Carol Howle, Interim CEO

This is a JV discussion. The decision to move forward with Mona is one for the JV. From our perspective, we are not looking at any increase or update regarding capital allocation to that JV. That just remains consistent with what we previously stated.

Operator, Operator

Thanks, Alastair. No questions on this side. I'm going to round two then. Lydia, the front, please.

Lydia Rainforth, Analyst

I haven't asked a question about technology and AI. I think it's one of my favorite topics. With regard to the progress made on AI, it won't just be a cost impact; it will also impact recovery rates, etc. Can you share your thoughts on the Agentic AI side?

Gordon Birrell, Executive Vice President, Production and Operations

I'll have a go at that. One of the things I'm particularly excited about is what we call Wells Advisors. BP has been drilling wells for over 100 years, so imagine the amount of learning, data, and knowledge we have in our system across a variety of systems. We've created an AI system where our well site leaders, the people on the rig making day-to-day decisions, can access all that data through Wells Adviser using AI as a platform. Huge benefits arise from this. We're also applying AI algorithms for kick detection, monitoring all our wells with additional oversight from monitoring centers in Houston and Sunbury. These algorithms can detect small kicks, allowing us to react before it becomes a problem, thus permitting smoother drilling. There are many examples across every technical discipline in my shop with input from my team's digital and AI expertise. I think every function within the company has examples like that.

Operator, Operator

Super great. We'll stay on this side with Lucas there, please.

Lucas Herrmann, Analyst

There seems to be a targeting of the balance sheet etc. It appears you're taking away from equity holders in the near term and asking them to stay with you. You aren't providing equity holders a date for greater distributions. Given your strategy, what’s the investment case for this stock? I'm curious how you view the investment case for BP.

Carol Howle, Interim CEO

I completely understand. The Board and the leadership team are clear that our strategic direction is right. We are focused on delivering that and improving performance and competitiveness safely. We know there's more opportunity, and that’s a good thing. This does not change when Meg comes in. It’s about delivering the primary targets. We have a portfolio of significant organic growth opportunities. The BP investment case is strong, leveraging our differentiated portfolio versus competitors while ensuring we maintain our capability to execute major projects effectively.

Gordon Birrell, Executive Vice President, Production and Operations

Lucas, I'd offer reasons to believe in the short term, medium term, and long term. Short term, the base is strong. What’s online today is being managed within a decline of 3% to 5%. Medium term, we aim for BPX to grow to 650,000 barrels per day of high-quality production, currently bringing an average return of 45% at $65 WTI and $3.50 Henry Hub. The Paleogene comes online 2029 to 2030, with Bumerangue providing Long term value. We have numerous promising exploration opportunities, all supporting value creation.

Operator, Operator

Thank you, Lucas. And I’ll reiterate Jim’s address earlier, our goal is a simpler, stronger, and more valuable BP. Simplicity and strong action on the portfolio will create optionality. Strength puts the focus on our cost and revenue opportunities. That leads to a more valuable BP with a clear focus on long-term optimization. Please note, we don't run the company for the next week or quarter; we aim for long-term value optimization. Thank you for gathering today, and I appreciate your questions.

Kim Foster, Analyst

There's been revived interest in the MENA region. BP was early in this trend. Could you give us an update on early resource access and early-stage activity in Libya, Iraq, and Kuwait, and your exploration plans in the Gulf of Mexico?

Gordon Birrell, Executive Vice President, Production and Operations

There is an exploration well we're currently drilling called Matsola offshore Libya; it's the industry’s most-watched exploration well. We spudded the well in January, it’s a relatively short well, so we will know the results of this soon. Regarding Iraq, we've been in Rumaila for many years, keeping production stable. We've also been invited into Kirkuk with a significant use of 20 billion barrels in place. In Abu Dhabi, the P5 investment program is showing strong growth. Our Gulf of America exploration program is actively reloading the hopper, with increased potential opportunities in the Paleogene and more in exploration—we have many promising prospects.

Operator, Operator

Okay, we’ll move over to this side with Maurizio.

Maurizio Carulli, Analyst

I wanted to ask about how the three new Board members are filtering through into day-to-day business?

Carol Howle, Interim CEO

Albert is our Non-Executive Chairman, responsible for the oversight of our delivery and strategy. We interact frequently, sharing progress against strategic milestones and competitor insights. Their diverse perspectives help us in decision-making to generate better outcomes. With the changes to the Board composition, we have experienced industry experts who challenge us effectively, enhancing how we operate.

Katherine Thomson, CFO

During my two years on the Board, I've witnessed the quality of conversations improve. Albert brings a fresh style that has been very supportive, challenging us with insightful questions that enhance strategic discussions. The addition of leaders with extensive upstream experience creates a strong focus on succession, ensuring the company's strategy is thoroughly implemented.

Gordon Birrell, Executive Vice President, Production and Operations

I find the addition of Dave Hager and Simon Henry as tremendous challenges. Their experience allows them to challenge William Lynn and myself effectively in oil and gas investments. I’d also call out Melody Meyers for her contribution; her focus on safety has made us a better company.

Joshua Eliot Stone, Analyst

I wanted to ask officially what your view is on the potential of BPX as a consolidated business. Could this be independent and strategic, given the return potential for BPX seems attractive?

Carol Howle, Interim CEO

BPX remains a core part of BP. It's got a strong production forecast and a wealth of onshore expertise that is difficult to replicate. Regarding the decision on integrated versus independent, we focus on creating the best value for BP. If we can achieve better value for the company through a different structure based on facts and circumstances, we will do it.

Gordon Birrell, Executive Vice President, Production and Operations

Right now, BPX holds about 7 billion barrels of oil and gas equivalent in place; our position is strong. We are first and second quartile in NPV per acre in several areas. BPX is core to our company; we have no intention to sell this off at this point.

Operator, Operator

Thanks, Gordon. We'll go to the phone follow-up question with Paul Cheng. Paul?

Paul Cheng, Analyst

On the developments ahead of you by 2027, is it feasible within the current CapEx frame, and how will you keep costs under control?

Katherine Thomson, CFO

With respect to the Capital Expenditure frame, Gordon and William challenge me regularly on competing for capital within the frame. We’re comfortable with the target level over the next two years. There is no need to change our frame; however, it was on those significant opportunities going forward. To keep costs under control, it's about leveraging technology, AI, and optimization initiatives to drive cost efficiency.

Gordon Birrell, Executive Vice President, Production and Operations

The current Paleogene projects are fully funded within our capital frame. All our major projects are at the point of FID. We don’t anticipate the big spend on Bumerangue until we approach FID, enabling us to make objective choices. Applying technology and AI will help us ensure costs remain manageable.

Operator, Operator

Thank you, everyone, for attending today’s call. We appreciate your participation and engagement.