BP Writedown is Writing on the Wall

“The Moving Finger writes; and, having writ,
Moves on: nor all thy Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all thy Tears wash out a Word of it.”

― Omar Khayyám

Chris Hughes in Bloomberg:

BP Plc’s potential $18 billion writedown underscores just how significant a turning point 2020 is becoming for the oil industry. It baldly acknowledges that the major hydrocarbon producers are sitting on oil fields that will never be developed — because the pandemic has curbed energy demand and increased the desire for renewables within the supply mix.

The British oil giant has a new chief executive officer and a new finance director and it was already trying to break with the past before the impact of the Covid-19 crisis became fully apparent. The outbreak has prompted a more radical reassessment of BP’s future role and what its assets are worth.

BP’s assumption is that the long-term price of Brent crude will be about $55 per barrel, up to 30% lower than it thought previously. Among its oil major peers, the company’s management is shifting from the bullish to the bearish group. On that basis, some fields won’t earn adequate returns, and some of the world’s fossil fuels that would have been extracted and burnt now won’t be.

It’s a moment to be compared not only with peers’ comments of late, but with the seismic revaluations the industry has inflicted on investors over the past two decades — think ConocoPhillips’s $34 billion of asset impairments in the financial crisis.

The shift partly reflects the near-term reduction in economic activity. Energy demand is driven by gross domestic product and that’s expected to be sharply lower this year and next. BP also sees the pandemic accelerating the move to cleaner forms of energy as policymakers look to restart economies using less conventional energy, pushing up the cost of emitting carbon.

Equities may have recovered from their lows on the expectation that many countries are returning to work. But oil stocks have not, and manufacturers such as Tesla Inc., squarely focused on the transition to cleaner forms of power, have sharply outperformed.

Altogether, this hopefully begins to address the economic conundrum that has hampered the energy transition: the relative competitiveness of dirty and clean energy. The higher returns from putting another dollar into the development of conventional energy assets have simply been too tempting for oil majors to allocate serious funds to renewables. 

It may be some time before the returns BP makes from clean energy can compare with those from oil. Perhaps it can 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.

For now, the immediate impact on BP of the writedowns will be to weaken its balance sheet by inflating gearing, which measures net debt as a percentage of total capital. This was 36% at the end of the first quarter (against a long-term target of 20% to 30%). How significant this is will depend on the view of the credit-rating firms. But the pressure to lower leverage will be intense. That, in turn, forces a rethink of BP’s generous dividend.

A few weeks ago, CEO Bernard Looney was unapologetic about maintaining the payout amid the pandemic, suggesting the board would wait and see how the crisis developed. The contrast between that message and the hard conclusions aired on Monday couldn’t be more stark.

Raw Story:

In a statement, Greenpeace U.K. senior advisor Charlie Kronick welcomed the company’s change of tune and urged it to protect its workforce.

“As long as BP is drilling for oil, it’s part of the problem.”
—Jamie Henn, Fossil Free Media

“This huge dent in BP’s balance sheet suggests it has finally dawned on BP that the climate emergency is going to make oil worth less,” said Kronick. “BP must protect its workforce, and offer training to help people move into sustainable jobs in decommissioning and offshore wind.”

In a statement, company CEO Bernard Looney cited the likelihood of a reorientation toward the Paris Agreement goals of lowering emissions in the post-coronavirus economic rebuilding as a major reason the company revalued its energy stock.

“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,” said Looney.

But, Henn told Common Dreams, don’t be deceived.

“BP is trying to spin this announcement as part of its transition to a ‘green’ company, but so far we haven’t seen any fundamental changes to its business plan,” said Henn. “As long as BP is drilling for oil, it’s part of the problem.”

“Save your applause until BP announces its ceasing all exploration and rapidly phasing out existing production,” he added. “Until then, these vague commitments are about as meaningful as painting an oil rig green.”

Barrons:

Looking ahead. BP may be “softening shareholders up” for a dividend cut when it reports second quarter results on Aug. 4, AJ Bell investment director Russ Mould said. Analysts at investment bank Cowen, remained neutral on the stock pending clarity on any revised dividend policy. They said investors would look more kindly on a temporary cut, defined by a length of time or until oil prices return to a certain level.