BP PLC's announced write-down of as much as $3 billion in the third quarter due to recent divestments highlights the challenging nature of the current M&A environment, RBC Capital Markets analysts said.
While BP said Oct. 11 that it is ahead of schedule in reaching its $10 billion divestment target by the end of this year instead of 2020, the London-based supermajor expects to take a hit of $2 billion to $3 billion in the third quarter due to recent assets sales.
"While this move is encouraging in some ways, we continue to see it as a difficult market for asset sales in the upstream, and therefore expect valuations to be depressed for asset sales," RBC analyst Biraj Borkhataria wrote Oct. 11.
In August BP inked a deal to sell its Alaskan business to Hilcorp Energy Co. for $5.6 billion, and in June, BP agreed to sell four packages of legacy assets from its U.S. Lower 48 business for an undisclosed amount.
However, BP's non-cash, non-operating, after-tax charge related to these divestitures is expected to increase gearing in the short term, which should remain above the top end of its 20% to 30% range through the end of this year, the major said. Through 2020, BP's gearing should then move down to the middle of that same target range.
The company's indebtedness reached 31% at the end of the second quarter, a sticking point for analysts despite BP's overall positive metrics for that period.
"Given the significant de-rating in U.S. E&P land, we question whether this relates to BP's legacy U.S. onshore gas operations, however," Borkhataria said.
The sale of BP's legacy assets was kicked off in 2018 to help fund its $10.5 billion purchase of U.S. oil and gas assets from BHP Group.
BP will report third quarter financial results Oct. 29. BP shares on the London Stock Exchange closed the Oct. 11 session down 1.68% at £4.94.
