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

The downgrade stems from concerns over BP’s high exposure to underperforming areas, reliance on asset sales for debt reduction, and fixed cash obligations impacting shareholder distributions.

Key Factors Behind the Downgrade

1. Rising Debt and Limited Shareholder Returns

• BP’s net debt is projected to rise by $2 billion in 2025 due to ongoing share buybacks.
• An anticipated annual debt increase of $0.5 billion through 2028 is expected if buybacks stay at the lower end of BP’s cash flow target.
• The company aims to reduce its $20 billion debt to a target of $14-18 billion, primarily relying on divesting $20 billion worth of assets.

2. Challenges in BP’s Upstream Business

• Low production growth is expected until the late 2020s, with significant Gulf of Mexico projects coming online later.
• Production growth is anticipated to lag 5% behind the peer average due to BP’s positions in certain regions.

3. Fixed Cash Obligations Limit Flexibility

• Substantial payments related to past liabilities and debts will consume around 25% of cash flow, compared to only 6% for peer companies.
• This situation significantly constrains BP’s ability to enhance shareholder returns through increased buybacks or dividends.

Potential Upside: BP’s Strategic Shift

Despite the downgrade, TD Cowen acknowledges BP’s new strategy to focus on:

• Reducing expenditures on renewables.
• Enhancing operational efficiency.

This shift could benefit BP’s competitive standing in the long run.

Investment Implications

• Reliance on asset divestitures to manage debt poses risks for BP if these targets are unmet.
• Upstream growth prospects remain concerning, with a production gap anticipated until 2027.
• High cash obligations hinder shareholder returns, impacting investment allure.

Conclusion

TD Cowen’s downgrade reflects legitimate worries over BP’s financial flexibility and shareholder returns due to high cash commitments and slow growth. While a shift in strategy could yield long-term advantages, the near-term outlook raises concerns over cash flow management.