BP Warns of Q2 Charge of Up to $17.5 Billion

Citing the COVID-19 pandemic as both cause and long-term effect, BP PLC (NYSE: BP) on Monday announced that the oil and gas supermajor will take a noncash impairment charge of between $13.0 billion and $17.5 billion in the second quarter. The write-down follows a review of the company’s long-term price assumptions for oil, natural gas and carbon.

The write-offs include impairment charges against plant, property and equipment (PPE) and exploration intangibles. The second-quarter write-offs represent only a part of an estimated total write-down of $8 billion to $11 billion in PPE and $8 billion to $10 billion in exploration intangibles. That implies future write-offs of $3.0 billion to $4.5 billion.

The company said that it now reckons the effects of the pandemic “having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.”

Company management also 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 now estimates that the average price for a barrel of Brent crude out through 2050 will be around $55 a barrel. Natural gas at the Henry Hub (the main U.S. pricing point) is now forecast at $2.90 per million BTUs.

When the company filed its annual report for 2019 in March, BP offered three estimates of the 20-year average for Brent crude, natural gas and its refining marker margin. The high estimate for Brent assumed a price of $90 a barrel, the central estimate called for a price of $70 a barrel and the low estimate estimated a price of $50 a barrel. The high, central and low estimates for natural gas were $5, $4 and $2, respectively. Note that these estimates referred to prices through 2040.

The third estimate BP published in March called for the price of carbon to range from a high of $80 per metric ton (tonne) to a central forecast of $40 per tonne to a low of zero. The company now estimates the average price of carbon through 2050 at $100 per tonne.

The new price assumptions are “broadly in line” with a series of steps BP announced in February to bring the company into compliance with the climate goals of the Paris Accords. Those steps add up to reducing emissions to net zero across all the company’s operations by 2050 or sooner. For BP, getting to net zero means eliminating emissions totaling 55 million metric tons of carbon emissions from its operations and 360 million metric tons from the content of its oil and gas production. The company noted: “Importantly these are absolute reductions, to net zero, which is what the world needs most of all.”

BP noted Monday that it is reviewing its “intent to develop some of its exploration prospects.” That means that the company is also reviewing the carrying values of its intangible assets. In a note to the announcement, the company referred to its 2019 annual report: “[T]he majority of bp’s reserves and resources that support the carrying amount of the group’s oil and gas properties are expected to be produced over the next 10 years.” Reductions in the company’s carrying values almost certainly would be larger in aggregate than the write-downs disclosed Monday morning.

Investors had taken the company’s American depositary shares (ADSs) down by about 4.8% Monday morning. Those shares were trading at $23.55, in a 52-week range of $15.51 to $42.70 and against a 12-month price target of $32.45.

What concerns investors most is the impact the write-down will have on BP’s annual dividend of $2.52 per ADS. At Friday’s closing price of $24.75, the dividend yield was 10.18%. For BP to continue to pay that, cash flow needs to come from somewhere. So far, the company has not said where.

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