Implications of BP write-down are very real

BP has announced it will write down as much as $13–17.5bn on the value of its assets when it reports its second quarter results.

Commenting on the news, Luke Parker, Vice President, Corporate Analysis, at Wood Mackenzie, says: ‘The impairment shouldn’t come as a big surprise. The risks were clearly flagged in BP’s 2019 annual report.While these are non-cash charges, with no bearing on cash flows, the implications – near-term and long-term – are very real.’

‘In the near-term, the impact of a $17.5bn write-down on shareholders’ equity would push BP’s gearing ratio to 45% (including lease liabilities, 41% excluding). A $13bn write-down would push these figures to 44% and 40% respectively. This is uncomfortably high. Greater urgency to pay down debt will put further pressure on the dividend. Of course, under BP’s latest price assumptions, cash generation will be less than previously anticipated.’

‘In the longer term, this is about BP’s strategic shift away from oil and gas. While that will be a multi-decade affair, BP is already getting to grips with the idea that its upstream assets are worth less than it believed as recently as six months ago. Indeed, some of them are worth nothing.’

‘Big picture, we see this as another step in the re-rating of oil and gas, and the journey from Big Oil to Big Energy. BP is working through the detail of the “reimagine” strategy that it unveiled in February. That will be presented in September, and will provide a much clearer picture of BP’s plans for capital allocation and cashflow generation as it makes the transition to net zero.’