BP bows to reality as it writes down $17bn of assets

The oil giant has ditched its conspicuously bullish outlook and written down the value of its assets. Will it cut its dividend too? Matthew Partridge reports

BP has announced that it will slash $17.5bn off the value of its oil and gas assets as it takes a “downbeat” view of longer-term oil prices in the wake of the pandemic, says Anjli Raval in the Financial Times. The company now thinks that Covid-19 will not only have a “lasting impact” on the global economy but will also “accelerate the transition towards cleaner energies”. As a result it is cutting the long-term price assumption for crude oil and natural gas by over a quarter to $55 a barrel in the case of Brent Crude, and to $2.90 per million British thermal units for gas.

BP’s move is long overdue, says Nils Pratley in The Guardian. The recent plunge in crude left BP’s assumption that long-term prices would be around $75 a barrel, already a more bullish outlook that its rivals’, “looking silly”. Still, it means that a chunk of BP’s current oil and gas assets “will never be developed”. This should encourage CEO Bernard Looney to speed up his plan for “greening BP and supporting energy transition”. At present BP’s spending on renewables is limited to a “tokenistic” $500m out of an investment budget that will be $12bn even after the recent “sharp trim”.

Time to go green?

The revised expectations of future oil prices could remove one of the major barriers to increased investment in renewables: higher returns from putting money into oil and gas have “simply been too tempting” for oil majors, says Chris Hughes on Bloomberg. There is even a possibility that BP could decide to “make a virtue of diversification”, offering large business clients “energy from multiple sources in a way that combines security of supply with an increased proportion of renewable provision”. 

However, in the short run the immediate impact will be to weaken BP’s balance sheet by increasing its gearing, the ratio of debt to net assets. Since gearing is a “closely watched ratio”, BP will be under pressure to take action to reduce it, says Emily Gosden in The Times. One option is to reduce debt through asset sales. However, the fact that this is a “terrible part of the cycle” to be selling means that it’s not going to get much cash. This leaves cutting its dividend, at $8.5bn a year the biggest in the FTSE, as the only other option. With rival Shell having already chosen to cut its payout to shareholders, many think it is a question of “when not if” BP will follow suit.

Cutting its dividend could risk anger from shareholders, especially since many think the pandemic will “encourage more people into their cars, pushing up fuel consumption and oil prices”, says George Hay on Breakingviews. BP’s $30-odd billion of cash also allows it to maintain the dividend “for now”. Still, since keeping the payout will hamper further investment in renewables, BP’s choice may be between “annoying shareholders today, or in the future”. In any case, BP’s shares now yield 9%, suggesting investors have already priced in a cut.

Recommended

What’s the world’s most hated market? I hate to say it, but you probably live there
UK stockmarkets

What’s the world’s most hated market? I hate to say it, but you probably live there

UK stocks are among the most hated in the world – almost nobody is buying. John Stepek explains why, and wonders if that presents an opportunity for c…
20 Oct 2020
Cash in on a profitable end to the oil era
Oil

Cash in on a profitable end to the oil era

Cheap oil stocks could still make a lot of money and carve out a new future before oil demand peaks
20 Oct 2020
Funds to buy UK small-cap stocks on a discount
Investment trusts

Funds to buy UK small-cap stocks on a discount

Investment trusts investing in smaller companies are recovering, yet share prices haven’t caught up, says Max King.
19 Oct 2020
Oil shares have never been this cheap – but will they just get even cheaper?
Energy

Oil shares have never been this cheap – but will they just get even cheaper?

The oil sector is staggeringly cheap. But oil is still one of the most important commodities in the world. John Stepek looks at where energy stocks mi…
16 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020