Monday 15 June 2020 5:07 pm

BP to write off up to $17.5bn after oil price crash

BP is set to write off up to $17.5bn (£13.9bn) from the value of its assets after the oil price crash earlier this year, as the oil major revises its long-term energy price forecasts.

The London-headquartered firm said it would incur writedowns of around $13bn to $17.5bn in the second quarter of 2020.

BP said it had lowered its oil price forecast in expectation that the aftermath of the coronavirus crisis will accelerate the transition to a low-carbon economy.

The pandemic will have an “enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period”, the company said.

BP is currently undergoing a major shake-up of its business under new chief Bernard Looney, as it anticipates the shift towards cleaner fuels.

It comes as BP last week announced it will cut 10,000 jobs across the business in a bid to bolster its balance sheet amid the coronavirus crisis.

In an email to BP’s 70,000 staff, Looney said: “The oil price has plunged well below the level we need to turn a profit. We are spending much, much more than we make — I am talking millions of dollars, every day.”

The pandemic has seen a sharp drop in global demand, will oil prices falling as much as 70 per cent this year.

The oil giant today revised its long-term price assumption for benchmark Brent crude, which is currently trading at around $37 a barrel, to around $55 a barrel between 2021 and 2050.

“The revised prices are around 30 per cent lower than previous assumptions,” a company spokesman said.

“Something like this has been long overdue from BP, already paying a dividend that has been unsustainable for several years,” said Michael Hewson, chief market analyst at CMC Markets.

“Having seen its sector peer Royal Dutch Shell bite the bullet and cut its dividend a few weeks ago, it would appear that BP is likely to have to follow suit, if it wants to reduce its already high debt levels and shore up its balance sheet for the new challenges ahead. ” 

The company is also reviewing its plans to develop its exploration prospects. It is subsequently assessing the carrying values of some of its intangible assets, the company said.

Shares fell more than five per cent at market open to 306.65p on the news, before closing 2.2 per cent down at 316p.

“This will only raise speculation that the board will be forced into cutting the dividend sooner or later,” said Neil Wilson, chief market analyst at Markets.com.

Many investors, including Sarasin & Partners, have long argued that oil majors’ use of overly optimistic long-term energy price assumptions has led them to overstating their capital and ability to pay out dividends.

“While the group has made previous announcement of cost cutting measures and job cuts, it has still been resistant to make any mention of its dividend,” said Helal Miah, investment research analyst at The Share Centre.

“However, this morning’s announcement may be the management’s way of softening the blow and leading us to expect a cut in the dividend when they publish the second quarter results in early August.”

David Madden, market analyst at CMC Markets said: “BP was already moving towards becoming carbon neutral, so the health crisis is likely to speed up the process.

“In late April, the oil titan maintained its dividend in the face of weaker oil prices, so now traders will be wondering if the payout will be cut in a bid to conserve cash.”  

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