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BP to take up to $17.5 billion hit on lower oil price forecast

Company also reviewing exploration prospects as it looks to transition to net zero emissions by 2050

UK supermajor BP could book impairments of up to $17.5 billion in the second quarter as it revises long-term price assumptions following the Covid-19 pandemic and its goal of being a net zero emitter by 2050.

BP revealed Monday it expected to book non-cash impairment charges and write-offs of between $13 billion and $17.5 billion, post-tax, following a review of its long-term price assumptions and intangible assets.

The company’s long-term price assumption now averages about $55 per barrel for Brent and $2.90 per million British thermal units for Henry Hub gas from 2021-2050.

The Covid-19 outbreak has weighed on BP’s price forecasts, believing the virus could have “an enduring impact on the global economy”, resulting in weaker energy demand for a sustained period.

It also believes the pandemic will see countries seek to “build back better” and accelerate their transition to a low carbon economy.

BP also considers its long-term price assumption to be broadly in line with a range of transition paths consistent with the Paris climate goals, however, it added its assumptions did not correspond to any specific Paris-consistent scenario.

It also stated that, as part of its long-term strategic planning, it is in the process of reviewing exploration prospects and consequently assessing the values of its intangible assets.

While it said it could not currently provide a precise figure, it currently estimates non-cash, pre-tax impairment charges against property, plant & equipment to be in the range of $8 billion to $11 billion, and write-offs of exploration intangibles to be in the range of $8 billion to $10 billion.

BP chief executive Bernard Looney said the company had been developing a strategy to become “a more diversified, resilient and lower carbon company” since announcing its goal of reaching net zero emissions by 2050 or sooner.

“As part of that process, we have been reviewing our price assumptions over a longer horizon. That work has been informed by the Covid-19 pandemic, which increasingly looks as if it will have an enduring economic impact,” he said.

“So, 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. We are also reviewing our development plans. All that will result in a significant charge in our upcoming results, but I am confident that these difficult decisions – rooted in our net zero ambition and reaffirmed by the pandemic – will better enable us to compete through the energy transition.”

Berenberg analyst Henry Tarr said in a note on Monday that the roughly 30% reduction in price assumption was likely to push BP’s gearing above 40%, placing further pressure on the company’s balance sheet.

“As previously noted, there is an increasing probability of a dividend cut at BP to give breathing room to the balance sheet and enable greater investment and a swifter transition into lower carbon businesses,” Tarr said.

“This announcement reinforces the requirement to push gearing lower, and as a consequence will put further pressure on the dividend. At this point, we believe there is a high probability that BP will follow Shell and announce a material dividend cut at the Q2 results.”

Tarr also noted that BP’s lower commodity price outlook appeared to be “more realistic” and would likely encourage greater capital discipline by imposing a higher hurdle rate for new developments.

The decision to write down its assets and review its exploration and development plans was welcomed by environmental group Greenpeace.

“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 – something that smart investors have been warning for some time,” senior climate adviser for Greenpeace UK, Charlie Kronick, said.

“This is long overdue, and accelerating the switch to renewable energy will be vital not only to the climate but to any oil company hoping to survive in a zero carbon future.”

Kronick also called on BP to protect its workforce by offering training to help people move into sustainable jobs in decommissioning and offshore wind.

His request comes after BP announced earlier this month that it was set to cut 10,000 people from its workforce.

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