Investing.com -- TD Cowen cut its rating on BP (LON:BP) (NYSE:BP) stock to Hold from Buy, citing the company’s high exposure to lower netback regions and fixed calls on cash, limiting shareholder returns. The investment bank also trimmed its price target to $36 from $40.

The downgrade reflects concerns about BP's reliance on divestments to improve its balance sheet.

TD Cowen forecasts that net debt could rise by $2 billion in 2025 due to first-quarter buybacks, and by approximately $0.5 billion per year through 2028 if the company continues share buybacks at the lower end of its cash flow from operations (CFO) target of 30-40%.

As a result, the company's ability to reduce its current $20 billion debt to between $14 billion and $18 billion hinges on successfully executing its $20 billion divestment target.

TD Cowen also points out challenges in BP's upstream business, noting that it has significant exposure to less competitive cash netbacks due to its positions in the Middle East or equity affiliates.

“BP has limited Upstream production growth until late this decade when larger Gulf of Mexico projects come online, with production growth to 2027 at 5% below peer average,” TD Cowen’s Jason Gabelman noted.

Obligations such as Macondo payments, leases, and hybrid debt service are expected to account for roughly 25% of CFO in 2025, a figure significantly higher than the peer average of approximately 6%.

Despite these concerns, BP's updated strategy, which focuses on reducing renewables spend and improving operations, could put the company on better strategic footing.

Potential divestments, including Castrol, 50% of Lightsource BP, and onshore wind assets, could assist BP in reaching its divestment goals.

However, TD Cowen emphasized that these efforts would primarily serve to strengthen the balance sheet, and BP would still need to demonstrate improved operations and a more competitive upstream portfolio.

In a separate note, TD Cowen maintained a Buy rating on Shell (NYSE:SHEL), highlighting it as the best-positioned oil company among European peers to sustain attractive shareholder distributions, even in a lower price environment.

Shell's positive outlook is supported by a decrease in capital expenditures and an increase in cash flow from large projects that are now coming online. The firm expects Shell to reiterate its 6% FCF guidance through 2030 at its upcoming Analyst Day.

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