BP cuts price outlook, flags major writedown over faster, clean-energy shift

BP plans to write off up to $17.5 billion worth of assets after cutting its long-term price assumptions for oil and gas to reflect expectations that the coronavirus pandemic will accelerate the shift away from fossil fuels.

Flagging "growing expectations" that the pandemic would have a lasting impact on global demand for oil and gas, BP said it had lowered its Brent oil and Henry Hub gas price assumption for 2020-50 by 27% and 31%, respectively.

BP's new price assumptions for investment planning are now $55/b for Brent and $2.90/MMBtu for Henry Hub gas on a 2020 real basis, down from a previous outlook of $70/b and $4.30/MMBtu on a 2015 real basis. The company also revised its carbon price assumption to $100/mt CO2 equivalent in 2030.

As a result, BP said it expected to take impairment charges and write-offs in the second quarter of $13 billion-$17.5 billion.

BP said it was also reviewing its plans to develop some of its intangible exploration assets, a term usually used to refer to oil and gas exploration and production licenses.

"BP's management has a growing expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower-carbon economy and energy system, as countries seek to ‘build back better' so that their economies will be more resilient in the future," BP said in a statement.

BP's shares slumped by up to 6.5% at market open in London on June 15, underperforming its oil major peers and the FTSE100 which was initially up to 2.3% lower than Friday's close.

Concern over gearing

In February, BP's new CEO Bernard Looney set out ambitious new targets for the oil major to become a "net-zero" carbon emitter by 2050 or sooner to position the company to take a leading role in tackling climate change with cleaner energy.

Under a number of as yet, loosely defined goals, BP plans to get to net-zero on the carbon content of the company's oil and gas production by 2050 or sooner and see its oil and gas output declining gradually "over time." "Since then we have been in action, developing our strategy to become a more diversified, resilient, and lower carbon company," Looney said in the statement. "As part of that process, we have been reviewing our price assumptions over a longer horizon. That work has been informed by the COVID-19 pandemic, which increasingly looks as if it will have an enduring economic impact." BP estimated that non-cash, pre-tax impairment charges against property, plant & equipment will be in the range of $8 billion-$11 billion, and write-offs of exploration intangibles will be in the range of $8 billion-$10 billion.

The write-offs would likely push BP's debt gearing to 47.8%, by far the highest in the sector, according to Royal Bank of Canada analyst Biraj Borkhataria.

"BP's balance sheet was stretched even without this impairment, and is likely to look even more stretched following it," Borkhataria said in a note.

Long-term shift

Like many of its peers, BP is aiming to boost its investment in alternative, non-oil and gas energies, currently running at around $500 million a year, or roughly 3% of overall capital expenditure.

BP, which last week announced it would cut almost 15% of its workforce in response to the coronavirus crisis, said it believed lower long-term price assumptions were in line with a range of transition paths consistent with the Paris climate goals.

Speaking in late May, Looney said the coronavirus pandemic underscored BP's efforts to take a leading role in the push to cleaner, low-carbon fuels particularly amid rising uncertainty over the future demand for oil.

Most market watchers believe the pandemic could inflict lasting damage on future oil demand due to less commuting, fewer business trips, more online shopping, and a swifter uptake of renewable energy.

Greenpeace applauded BP's move, concluding that "it finally dawned on BP that the climate emergency is going to make oil worth less." "This is long overdue, and accelerating the switch to renewable energy will be vital not only to the climate but to any oil company hoping to survive in a zero-carbon future," senior climate adviser for Greenpeace UK Charlie Kronick said in a statement.

S&P Global Platts Analytics estimates that global oil demand could be around 3 million b/d lower than pre-pandemic forecasts over the coming decades as a result of weaker demand for transport fuels.