BP reported plans to write down the value of its assets by $13-17.5 billion, or as much as 6% of the total, in the second quarter, as a result of its long-term strategic planning. Further information is to be provided in the firm’s second-quarter results, which are expected to be released Aug. 4.
The energy giant had lowered its oil price expectations through to 2050, saying the coronavirus pandemic was likely to accelerate the transition to a lower carbon economy and energy system.
It now expects that the international benchmark Brent crude oil futures price will average about $55/bbl between 2021 and 2050, while Henry Hub’s natural gas price will average $2.9/MMbtu over the same period. The forecasts represent roughly downward revisions of 27% and 31%, respectively, when compared to those cited in the group’s annual report at the end of 2019.
Bernard Looney, chief executive of BP, said in a statement that the coronavirus outbreak “increasingly looks as if it will have an enduring economic impact.”
“We have reset our price outlook to reflect that impact and the likelihood of greater efforts to ‘build back better’ towards a Paris-consistent world,” Looney said.
BP said it has been reviewing its portfolio and capital development plans to realize its ambition to become a zero-net company by 2050 or earlier (OGJ Online, Feb. 18, 2020; Jun. 11, 2020).
The company said it was unable to precisely determine the impact of the revised impairment testing price assumptions on the group’s financial statements.
Earlier this month, BP said it would cut 10,000 jobs from the current 70,100 in response to the coronavirus crisis.
Speaking after BP announced it will write down as much as $17.5 billion on the value of its assets when it reports its second quarter results, Luke Parker, vice president, corporate analysis, at Wood Mackenzie, said: “The impairment shouldn’t come as a big surprise. The risks were clearly flagged in BP’s 2019 annual report.”
“While these are non-cash charges, with no bearing on cash flows, the implications – near-term and long-term – are very real.”
“In the near-term, the impact of a $17.5 billion write-down on shareholders equity would push BP’s gearing ratio to 45% (including lease liabilities, 41% excluding). A $13 billion write-down would push these figures to 44% and 40% respectively. This is uncomfortably high.”
“Greater urgency to pay down debt will put further pressure on the dividend. Of course, under BP’s latest price assumptions, cash generation will be less than previously anticipated.”
“In the longer term, this is about BP’s strategic shift away from oil and gas. While that will be a multi-decade affair, BP is already getting to grips with the idea that its upstream assets are worth less than it believed as recently as six months ago. Indeed, some of them are worth nothing.”
“Big picture, we see this as another step in the re-rating of oil and gas, and the journey from Big Oil to Big Energy. BP is working through the detail of the ‘reimagine’ strategy that it unveiled in February. That will be presented in September and will provide a much clearer picture of BP’s plans for capital allocation and cashflow generation as it makes the transition to net-zero.”
