The shift to cleaner energy: BP writes off over $17.5 billion post-tax.

The shift to cleaner energy: BP writes off over $17.5 billion post-tax.
  • BP predicts COVID19 will hurt long-term demand and accelerate the shift to cleaner energy.
  • Threats to its longstanding dividend see oil and gas plummet by 20% to 30% and an increase in the cost of carbon emissions.
  • Trends in energy consumption shift and policymakers pursue green targets.
  • The risk of stranded assets is just one of many challenges the industry faces
  • BP Plc will make the biggest writedown in a decade on the value of its business
  • BP will take non-cash impairment charges
  • BP write-offs in the second quarter estimated to be in a range of $13 billion to $17.5 billion post-tax.

 

Trends in the oil and gas sector could result in some oil discoveries being left in the ground.

That could increase gearing -- the ratio of net debt to equity -- toward 50%, by far the highest in the industry, said RBC analyst Biraj Borkhataria.

“BP’s balance sheet was stretched even without this impairment, and is likely to look even more stretched following it,” Borkhataria said in a note.

 

How has COVID 19 impacted the Oil industry and accelerated a shift to cleaner energy?

 

Weaker demand for energy for a sustained period

 “BP now sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period,” the company said in a statement on Monday.

“The aftermath of the pandemic will accelerate the pace of transition to a lower-carbon economy.”

Production will decline in the long term/slash in dividend

Peers including Royal Dutch Shell Plc, Total SA, and Equinor ASA have also set out agendas for what’s becoming an existential challenge for the oil industry.

Two of those companies -- Shell and Equinor -- cut their dividends last quarter. A growing number of analysts expect BP to follow.

”It does now look increasingly likely that BP will reduce the dividend alongside the second-quarter results,” Barclays said in a note. “With the shares trading on a 10% dividend yield, this already seems to be factored into the share price.”

 

Climate emergency is going to make oil worthless

BP’s revised investment appraisal long-term price assumptions from 2021 to 2050 now average $55 a barrel for Brent crude, down from $70 previously, and $2.90 per million British thermal units for Henry Hub gas, compared with $4 before.

It expects the cost of emitting a ton of carbon dioxide to be $100 in 2030, up from a previous assumption of $40.

These new prices are “broadly in line” with the Paris climate goals, BP said.

This huge dent in BP’s balance sheet suggests it has finally dawned on BP that the climate emergency is going to make oil worthless,” Charlie Kronick, senior climate adviser for Greenpeace U.K., said in a statement.

|As oil companies are forced to make changes due to the impact of COVID19, “BP must protect its workforce, and offer training to help people move into sustainable jobs in decommissioning and offshore wind.”

The company is scheduled to publish its second-quarter results on Aug. 4. Looney will give a more detailed road map for BP’s transition to clean energy and net-zero emissions in September.

Under its new Chief Executive Officer Bernard Looney, BP has been quicker than many of its peers to acknowledge and plan for these changes.

Yet moves toward a more sustainable future are bringing financial pain today, and investors are asking fundamental questions about the value of oil majors.

Shares of BP fell 3.9% to 310.35 pence as at monday.