Instrument Overview

The BP 9% Cumulative Second Preference shares are a legacy preferred-Equity instrument issued by BP PLC, one of the world’s leading integrated energy groups. The shares pay a fixed cumulative Dividend at a coupon of nine percent on Par Value and rank ahead of BP’s ordinary share dividend in the company’s payment hierarchy, while being subordinated to senior Debt and to the BP 8% Cumulative First Preference shares. The cumulative feature means that any preference dividend not paid in a given year accumulates and must be discharged before any ordinary dividend can be resumed.

Although the instrument is small relative to BP’s overall Capital base, it is a long-established part of the company’s Capital Structure, listed on the London Stock Exchange and traded in sterling. For income-focused investors, the security offers fixed sterling Yield, cumulative dividend protection and indirect exposure to BP’s diversified energy operations, all wrapped in a familiar preferred-equity format. The combination of fixed coupon and cumulative protection makes the instrument a useful building block in income-led portfolios.

Sector Backdrop

The energy sector backdrop remains highly supportive for the Credit profile of major integrated oil and gas companies, including BP. Multi-year underinvestment in non-OPEC Supply, OPEC+ production discipline, and resilient global oil Demand have kept crude prices in a constructive range. Natural Gas and LNG markets remain structurally tight, supporting strong integrated-gas Earnings. Refining margins have moderated from extreme peaks but remain healthy, and chemicals are stabilising. These dynamics translate into strong free-cash-flow generation for the issuer, which in turn supports the credit quality behind the preference instruments.

Sterling rates have been elevated relative to the past decade, compressing prices of long-duration fixed-coupon instruments. With UK and global central banks signalling a more balanced policy stance, the market is reassessing legacy preference shares of Investment-grade issuers. For long-term income investors, the combination of strong issuer fundamentals and depressed historic prices on fixed-coupon instruments provides what we consider an attractive entry point.

Investment Thesis

Our Buy view on the BP 9% Cumulative Second Preference shares is built on a combination of high fixed sterling yield, the security of cumulative protection, and the quality of the underlying issuer. The nine percent fixed coupon translates into a meaningfully higher running yield at prevailing prices than most comparable sterling investment-grade fixed-income alternatives. Although the instrument ranks behind the 8% First Preference shares, it still sits above ordinary equity in BP’s dividend hierarchy, providing strong income visibility under the company’s long-standing capital-returns policy.

Backing the income stream is one of the largest integrated energy issuers in the world. BP combines a global Upstream portfolio, a leading integrated-gas Franchise, world-scale refining and Marketing operations and a growing low-carbon Business. Its diversified earnings base and conservative balance-sheet management provide multiple layers of cash-flow protection for fixed-payment securities. With BP generating Cash Flow comfortably above its Capital Expenditure and ordinary-dividend bill, coverage of the modest preference dividend stream is extremely robust.

Energy Market Exposure

The preference shares do not capture Commodity-price upside in the way ordinary shares do, but they offer indirect exposure to BP’s diversified energy portfolio. The underlying business spans upstream oil and gas, integrated gas and LNG, refining and marketing, electric-vehicle charging, biofuels, hydrogen and renewables. This breadth provides natural balance through cycles, supporting BP’s ability to maintain dividend payments through different commodity environments. For investors seeking sterling income tied to a high-quality energy issuer but with reduced direct commodity Volatility, the security offers a useful profile.

Issuer Growth Drivers

BP’s strategic agenda continues to support its ability to comfortably service all classes of dividends. Upstream, the company is bringing on new low-cost barrels in places such as the Gulf of Mexico, the Middle East and Africa, while reducing exposure to lower-return basins. In integrated gas, BP is leveraging its global LNG portfolio and trading franchise to capture price differentials and structural growth in gas demand. In customer-facing businesses, the company is expanding its convenience-led mobility offer and growing the BP Pulse electric-vehicle charging network. In low-carbon, BP is selectively investing in renewables, hydrogen and bioenergy with a strong returns discipline.

Underpinning these growth platforms is a Balance Sheet that has been substantially repaired. Net debt has fallen significantly from peak levels, and the company maintains investment-grade credit ratings. These factors collectively reinforce the cash-flow cushion behind the preference dividend obligation and provide additional comfort to fixed-income-style investors.

The capital framework explicitly prioritises a resilient balance sheet, a competitive and progressive ordinary dividend, sustainable investment in growth, and returns of surplus cash through Buybacks. For preference holders, this framework is highly supportive: the ordinary dividend cannot be paid unless the preference dividends are met in full, which means BP’s clear and stated commitment to continue paying Ordinary Dividends effectively underwrites the preference distribution. The combination of cumulative protection, dividend-stopper Economics and a deep operating cash-flow cushion is a powerful structural protection.

Comparative Yield Considerations

The BP 9% Cumulative Second Preference shares offer a notable yield premium over sterling investment-grade corporate bonds of similar duration. The premium reflects subordination, the absence of a fixed Maturity date and lower trading Liquidity. In our view, the additional spread comfortably compensates for these features when the strength of the underlying issuer is considered. The instrument therefore serves as an effective sterling-yield enhancer within an income-oriented portfolio.

Relative to the BP 8% Cumulative First Preference shares, the 9% Second Preference shares offer a slightly higher running yield, reflecting their position one rung lower in the company’s preferred-equity stack. With the underlying cash-flow cushion at BP being many multiples of the combined preference dividend bill, we view the incremental subordination risk as well compensated by the higher running yield. For investors who already hold the first preference issue and are looking to expand sterling income exposure to BP, the second preference shares are a logical complementary holding.

Financial Performance of the Issuer

BP’s financial performance over recent reporting cycles has been characterised by strong cash generation, improving returns on capital and meaningful capital returns to shareholders. Cash flow from operations has comfortably covered capital expenditure, ordinary dividends and the bulk of buybacks, with the surplus used to reduce net debt. Underlying replacement-cost profit has been driven by higher realised hydrocarbon prices, strong contributions from integrated-gas trading and improved cost performance. Returns on average capital employed have advanced as non-core Assets have been divested and capital has been redeployed into higher-return projects.

For the preference shares, the practical implication is straightforward. With the underlying issuer’s cash-flow generation measured in tens of billions of dollars and the cumulative annual preference dividend bill measured in low millions, dividend coverage is many multiples of the obligation. The structural seniority of preference dividends over ordinary equity, combined with this scale of coverage, makes the income stream of the BP 9% Second Preference shares highly secure under any reasonable scenario.

Income and Yield Appeal

The principal attraction of the BP 9% Cumulative Second Preference shares is their fixed sterling income at a high coupon, combined with the cumulative protection that enhances payment certainty. At prevailing prices, the running yield typically compares very favourably with sterling investment-grade corporate bonds, gilts of similar duration and other preferred instruments. For investors managing income-focused portfolios, the security offers a way to lock in high sterling yield from a high-quality energy issuer without taking on direct commodity-price risk.

The instrument also offers Diversification within an income portfolio. Its return profile is dominated by the fixed sterling coupon rather than by short-term swings in commodity prices, which means it tends to behave more like a long-duration fixed-income instrument than like ordinary energy equity. For investors looking to reduce equity Beta within an income strategy while still capturing exposure to a high-quality global issuer, the BP 9% Cumulative Second Preference shares represent a useful tool.

Outlook for the Instrument

Looking ahead, the outlook for the BP 9% Cumulative Second Preference shares is supported by three factors: continued strength in BP’s underlying cash generation, the high probability that ordinary dividends continue to be paid, and the prospect of more stable long-dated sterling yields. With BP comfortably generating cash flow many times the preference dividend bill, the income stream looks highly secure. The dividend-stopper economics mean the preference dividend cannot be skipped while the ordinary dividend continues, which provides an additional layer of practical protection.

On the yield side, if sterling long-dated benchmarks stabilise or moderate from current levels, fixed-coupon instruments stand to benefit from spread compression and modest capital appreciation. Even in a flat-rate environment, the running yield alone provides an attractive return. The combination of secure income and potential modest Capital Gain underpins our positive view on the security.

Valuation Perspective

Valuation of long-duration fixed-coupon preference shares is highly sensitive to the level of sterling long-dated yields and to issuer credit spreads. On both metrics, we believe the current setup is attractive. Long yields appear closer to a peak than a trough in this cycle, suggesting limited downside from further rate-driven mark-downs. Issuer spreads on BP-linked instruments remain wider than implied by the strong underlying fundamentals. The combination of running yield, potential spread compression and modest interest-rate-driven re-rating supports a positive view on the security.

Total returns in a base-case scenario are therefore likely to be dominated by the high running yield, with modest additional contribution from potential capital appreciation if benchmark yields stabilise or if BP credit spreads tighten further. In a more bullish rate scenario, capital appreciation could be more substantial. In a more cautious rate scenario, the high running yield continues to deliver attractive carry. In each of these scenarios, the issuer’s underlying cash-flow coverage of the preference dividend remains far in excess of the obligation, supporting the integrity of the income stream.

Key Risks

Key risks to the investment case include interest-rate risk, since fixed-coupon instruments are sensitive to changes in long-dated benchmark yields; issuer credit risk, although BP retains investment-grade ratings and has materially deleveraged; subordination risk, with the second preference ranking below the first preference and senior debt; and Liquidity Risk, as preference share trading volumes are modest relative to the ordinary share. The cumulative feature mitigates but does not eliminate dividend-disruption risk in adverse scenarios. A prolonged collapse in global energy markets, although outside our base case, would compress BP’s cash flow and could affect distributions.

Conclusion

The BP 9% Cumulative Second Preference shares combine a high fixed sterling coupon, cumulative dividend protection and exposure to one of the world’s largest integrated energy issuers, all at a valuation that we view as compelling relative to comparable fixed-income alternatives. Cash-flow coverage of the preference dividend is many multiples of the obligation, and BP’s strategic and financial trajectory provides significant additional comfort. We assign a Buy rating, reflecting our positive view on the security as a high-quality sterling income vehicle backed by a strong global energy issuer, with attractive yield characteristics and modest scope for capital appreciation over time.