European investment bank Berenberg has nudged up its price target for BP to £7.20 from £7.15, keeping a buy rating on the oil major after what it called a “strong” third quarter. But the bigger story, according to the analysts, is not the earnings beat itself—it's how quickly BP is paying down its debt.
In a note published Monday, Berenberg pointed to “substantial progress” on deleveraging, or reducing debt. BP's net debt has already fallen below the low end of its previous $14–18 billion target (before counting leases). Yet the company still looks more leveraged than its peers once you include hybrid bonds and the Gulf of America settlement, the bank said.
What is deleveraging and why does it matter?
Deleveraging simply means a company is reducing the amount of debt on its balance sheet. For an oil major like BP, debt levels matter because they affect how risky the company looks to lenders and investors. Lower debt generally means lower interest costs, less financial stress, and a stronger ability to weather downturns in oil prices.
Investors often compare oil companies using a leverage ratio that includes not just traditional debt but also hybrid bonds—securities that behave like debt but can be treated like equity in some calculations—and other obligations. On that broader measure, Berenberg estimates BP still needs to cut roughly another $15 billion of debt to reach the middle of the pack among its peers. Much of that reduction could happen in the fourth quarter, the bank said.
What this means for BP's strategy
The framing suggests BP may prioritize debt paydown over faster share buybacks heading into December's strategy day, when management is expected to lay out its plans for the coming years. Berenberg also raised its adjusted earnings per share forecasts for 2026–2028, but the analysts see the balance sheet as the key driver of the stock's value.
For investors, the distinction matters. Buybacks are often seen as a way to boost earnings per share and return cash to shareholders, but they can also be a sign that a company has limited better uses for its money. Debt reduction, on the other hand, strengthens the balance sheet and can lower the company's cost of capital—the rate of return investors require to hold its stock. A lower cost of capital can justify a higher valuation multiple, even if buybacks come later.
Berenberg's $15 billion deleveraging gap could do more for BP's valuation than the next buyback headline, the bank suggested. If BP keeps shrinking its debt load on the leverage measure investors use to compare oil majors, the company can start to look less risky to lend to and own. That tends to lower its cost of capital, meaning markets apply a less punitive discount rate to BP's future cash flows and can justify a higher valuation multiple.
Broader context: oil prices and the sector
The oil and gas sector has been navigating volatile crude prices, with recent swings driven by geopolitical tensions and supply concerns. For example, oil prices slid 3% after Iran-Qatar talks eased war fears, though shipping costs remain elevated. Such price moves directly affect BP's revenue and cash flow, making its debt reduction progress even more important as a buffer.
Berenberg's note also comes amid a broader trend of European banks reassessing oil majors. Earlier, the bank trimmed profit forecasts for Glencore after a copper miss, and cut its price target for Safran on higher spending plans. But for BP, the focus is clearly on the balance sheet.
What investors should watch next
With December's strategy day approaching, investors will be looking for signs that BP's management is committed to a debt-first path. If the company continues to deleverage at the pace Berenberg expects, it could support the higher price target and potentially lead to a re-rating of the stock.
For everyday investors, the takeaway is that BP's story is less about near-term earnings tweaks and more about whether management doubles down on reducing debt. That could make the stock more attractive to investors who value financial stability, even if it means waiting longer for bigger buybacks.
As always, it's important to remember that analyst price targets are just one opinion, and the actual stock performance will depend on a range of factors, including oil prices, global demand, and BP's execution of its strategy.
