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BP cuts long-term oil price assumption by 30 per cent

Supermajor flags up to $17.5bn in write-downs because of forecast drop to $55/bbl
BP cuts long-term oil price assumption by 30 per cent

BP (BP.) has cut its long-term oil price forecast, knocking up to $17.5bn (£14bn) off the value of its assets because they are valued at $70 per barrel (bbl). This drop has raised the spectre of stranded assets and project cancellations.

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The energy giant said accelerated green programmes during the Covid-19 recovery would see more investment in lower-carbon technologies, hitting oil demand. The new long-term price forecast is $50/bbl. 

The writedown forecast for the June quarter results is between $13bn and $17.5bn. This is split between property, plant and equipment and exploration assets. 

Chief executive Bernard Looney said Covid-19 would 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,” he said. The company is also reviewing its development plans, Mr Looney said. There are several major projects in the pre-final investment decision phase, like the Clair South expansion in the North Sea. 

BP said its new forecasts - which included gas at $2.90 per British thermal unit (Btu) - were “broadly in line with a range of transition paths consistent with the Paris climate goals”.

Last week, Carbon Tracker released a new report saying oil and gas companies’ growth-focussed approach would mean stranded assets and write-downs as demand falls off and governments bring in more Paris Agreement-related regulation.

Earlier this month, the major said it would cut 10,000 jobs globally in response to Covid-19, around 15 per cent of its workforce.

Unlike Royal Dutch Shell (RDSB), BP has maintained its dividend despite its earnings being smashed by the oil price crash. Jefferies analyst Jason Gammel said the job cuts, $55/bbl estimate and upcoming lower-carbon strategy initiatives would likely see this decision revisited.

Consultancy firm Wood MacKenzie said leverage climbing as a result of the impairment would also push the dividend issue. “In the near-term, the impact of a $17.5bn write-down on shareholders’ equity would push BP’s gearing ratio to 45 per cent (including lease liabilities, 41 per cent excluding),” said WoodMac analyst Luke Parker. BP’s target gearing range is 20-30 per cent, and it was at 36 per cent as of 31 March.