Goldman Sachs: Strong Q1 2026 Cash Flow for European Oil Majors, Bullish on BP and Repsol

Overview

This report summarizes the Q1 2026 performance of European large oil and gas companies (Big Oils). Overall, sector free cash flow (FCF) reached $29.7 billion, exceeding expectations by 14%, primarily driven by operating cash flow (OCF) outperforming expectations by 9%. Despite seasonal working capital increases leading to higher net debt, core profitability remains robust. Goldman Sachs identifies three key themes: strong crude trading with LNG trading expected to follow in Q2; capital discipline remains but early signs of a new capex upcycle are emerging; and summer jet fuel markets face physical shortages, benefiting companies like Repsol with relevant capacity.

Core views

Demand and Trading Environment: Q1 crude and refined product markets experienced significant volatility due to geopolitical disruptions related to the Strait of Hormuz, boosting downstream and crude trading profits for Shell, BP, and TotalEnergies by $4.4 billion (+194%) quarter-on-quarter. In contrast, natural gas trading profits only increased by $500 million, but Goldman Sachs expects the lagged effect of LNG pricing to become more apparent in Q2. Capital Allocation and Expenditure Cycle: While management rhetoric still emphasizes capital discipline, industry reinvestment rates remain well below historical averages (currently 40-60% of operating cash flow vs. a historical average of ~75%). However, TotalEnergies is evaluating accelerated short-cycle investments, and Shell reduced quarterly buybacks from $3.5 billion to $3 billion, signaling potential future investment increases. Goldman Sachs believes the global oil and gas industry is on the cusp of a major capex upcycle, similar to the early 2000s, driven by shrinking reserve life and upward revisions to IEA demand forecasts. Company-Specific Performance: BP is seen as a major beneficiary due to its high spot LNG exposure and proven ability to convert volatility into excess returns during the 2022 energy crisis, with lower direct upstream exposure to the Strait of Hormuz. Repsol is well-positioned for summer jet fuel shortages, planning a 25% increase in jet fuel production in May. Galp, with its Brazilian Bacalhau project coming online, is expected to achieve over 20% production growth in the next two years, with one of the longest reserve lives in the industry.

Analysis framework

Goldman Sachs employs a top-down and bottom-up analytical framework. First, it aggregates overall financial data (OCF, FCF, net debt) of European oil majors to assess sector health. Second, it dissects business segment performance, particularly focusing on 'Trading Capability' as a key variable to analyze profit elasticity amid oil and gas price volatility. Additionally, the report introduces a 'Top Projects' database, tracking reserve life, production growth curves, and top project pipelines to evaluate long-term growth and asset quality. Finally, it incorporates geopolitical scenarios (e.g., Strait of Hormuz disruptions) for stress testing to quantify risk exposure to key transit routes.

Methodology notes

• Industry Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  The report analyzes the gap between summer jet fuel physical supply tightness (demand side) and potential Middle East export disruptions (supply side) to derive refining margin trends, applying classic commodity supply-demand balance analysis.

• Company Fundamentals & Financial FrameworkFree cash flow analysis

  Free Cash Flow Analysis

  The report tracks deviations of OCF and FCF from consensus expectations and analyzes working capital impacts on net debt to assess true profitability and financial flexibility.

• Cycle & Sentiment FrameworkCapacity/Equipment Cycle (Juglar)

  Capacity/Equipment Cycle (Juglar)

  The report notes industry reinvestment rates remain below historical averages, with shrinking reserve life signaling the potential start of a major capex upcycle, similar to the early 2000s.

• Competition & Strategy FrameworkMoat / competitive advantage

  Moat/Competitive Advantage

  The report highlights BP and Shell's structural advantages in LNG trading portfolios—scale, flexibility, and integration—that enable them to capture excess returns during price volatility, forming their competitive moats.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• BP

  Benefit: High spot LNG exposure enables capturing price volatility, with lower Strait of Hormuz risk.

  Strengths

  Successful trading organization, deep US business exposure, profitable positions in deepwater, integrated gas, and convenience retail.

  Comparison

  Compared to Shell and TotalEnergies, BP is more defensive against Strait of Hormuz risks and has greater LNG trading elasticity.

  Risks

  Natural gas price volatility falls short of expectations.

• Repsol

  Benefit: Summer jet fuel shortage expectations align with its plans to increase production, directly translating to profits.

  Strengths

  Most attractive energy transition story, highest low-carbon business value as % of EV (~26%), undervalued.

  Comparison

  Among refiners, its jet fuel capacity expansion strategy positions it favorably for summer conditions.

  Risks

  Refining margins decline.

• Galp

  Benefit: Brazilian Bacalhau project coming online drives significant production and cash flow growth.

  Strengths

  High-quality upstream asset base, one of the longest reserve lives in the industry, Namibia exploration optionality.

  Comparison

  Among European oil majors, its near-term production growth outlook stands out.

  Risks

  Project delays.

• Shell

  Benefit: High asset quality, leading LNG and marketing businesses, strict capital discipline.

  Strengths

  Global LNG and marketing leadership, strong chemicals presence, structural cost savings.

  Comparison

  Has the most attractive upstream project pipeline, supporting robust production and cash flow growth.

  Risks

  Cost inflation.

• TotalEnergies

  Neutral/Benefit: Strong production growth, but valuations partially reflect expectations.

  Strengths

  Long reserve life (>20 years) for top projects, multiple large projects nearing completion.

  Comparison

  Leads in production growth but rated Neutral.

  Risks

  Higher geopolitical risk exposure.

• Saudi Aramco

  Benefit: Most defensive, strongest balance sheet.

  Strengths

  Lowest leverage among global IOCs, industry-low cost position, highest FCF conversion.

  Comparison

  Its defensive attributes outperform peers in an uncertain 2026 environment.

  Risks

  Sharp oil price declines.

Key data

• 1Q26 Sector Free Cash Flow (FCF)$29.7 billionExceeded expectations by 14% (expected $26.1 billion)
• 1Q26 Sector Operating Cash Flow (OCF)$49.5 billionExceeded expectations by 9% (expected $45.3 billion)
• 1Q26 Working Capital Increase$27.4 billionLed to ~$15 billion quarter-on-quarter increase in sector net debt
• Shell, BP, TotalEnergies Downstream & Crude Trading Profit QoQ Change+$4.4 billion (+194%)Driven by March refining margin recovery and crude trading volatility
• BP 2022 Integrated Gas Earnings Excess$8.5 billionEquivalent to 26% of 2026 expected CFO
• Repsol Jet Fuel Production Increase Target25%Starting May, yield increasing from ~10% to 12-13%
• Galp 2025-26E Production Growth Forecast>20%Driven by Brazilian Bacalhau project coming online

Impact & implications

For investors, the report suggests companies with strong trading capabilities and low Strait of Hormuz risk exposure (e.g., BP) offer higher safety margins and upside potential amid heightened geopolitical tensions and energy market volatility. Simultaneously, as the industry shifts from pure shareholder returns to renewed investment, companies with high-quality project pipelines and long reserve lives (e.g., Galp, TotalEnergies) will gain long-term competitive advantages. Summer jet fuel market tightness will provide short-term profit spikes for refiners like Repsol.

Risks

• Strait of Hormuz disruptions impacting production or exports (especially for high-exposure companies like TotalEnergies, OMV).
• Asian natural gas demand falling short, pressuring long-term gas prices.
• Capital expenditures rising too quickly, eroding free cash flow and shareholder returns.
• Geopolitical conflict escalation leading to severe market volatility.

What to watch

• Q2 LNG trading profit realization, particularly for BP and Shell.
• Summer and early autumn European jet fuel and diesel physical supply tightness and crack spreads.
• Changes in 2027 capex guidance from oil majors, confirming an upcycle.
• Strait of Hormuz developments and actual impacts on Middle East crude and LNG exports.