As a consequence of its ambition to become a net zero company by 2050, a review of its portfolio and its capital development plans, the COVID-19 pandemic having an enduring impact on the global economy and a possible weaker demand for energy for a sustained period, as well as a possible acceleration of transition to a lower carbon economy and energy system, BP p.l.c. (bp) has revised its long-term price assumptions.
bp has lowered its long-term price assumptions and extended the period covered to 2050 to align with its ambition horizon. As part of its long-term strategic planning, and in the context of its continuing focus on capital discipline, bp is also reviewing its intent to develop some of its exploration prospects and consequently is assessing the carrying values of the group’s intangible assets.
These actions will lead to non-cash impairment charges and write-offs in the second quarter, estimated to be in an aggregate range of $13 billion to $17.5 billion post-tax.
“In February we set out to become a net zero company by 2050 or sooner,” said Bernard Looney, bp chief executive officer.
“Since then we have been in action, developing our strategy to become a more diversified, resilient and lower carbon company. 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.
“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.”
“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.”
Luke Parker, vice president, corporate analysis, at Wood Mackenzie, said the write-down shouldn’t come as a big surprise as 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 US$17.5 billion write-down on shareholders’ equity would push bp’s gearing ratio to 45 per cent (including lease liabilities, 41% excluding). A US$13 billion write-down would push these figures to 44 and 40 per cent 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.
Mr Parker said 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.”
Revised long-term price assumptions
bp’s revised investment appraisal long-term price assumptions are now an average of around $55/bbl for Brent and $2.90 per mmBtu for Henry Hub gas ($2020 real), from 2021-2050. These lower long-term price assumptions are considered by bp to be broadly in line with a range of transition paths consistent with the Paris climate goals. However, they do not correspond to any specific Paris-consistent scenario.
As a result of the revision of long-term price assumptions used for investment appraisal, bp has also revised the price assumptions it uses in value in-use impairment testing and these are now aligned to bp’s revised investment appraisal price assumptions.
bp has also revised its carbon prices for the period to 2050 and these now include a price of $100/teCO2 in 2030 ($2020 real).
Estimated impairment charges and exploration write-offs
bp’s impairment and intangible assets assessments are in progress and it is not possible at this time to precisely determine the impact of the revised impairment testing price assumptions, or the outcome of the assessment of intangible assets, on the group’s financial statements.
However, bp currently estimates that non-cash, pre-tax impairment charges against property, plant & equipment (PP&E) in the range of $8 billion to $11 billion, and write-offs of exploration intangibles in the range of $8 billion to $10 billion, will be reported in its second-quarter 2020 results.
bp currently estimates that the aggregate second-quarter 2020 non-cash, post-tax PP&E impairment charges and exploration intangible write-offs will be in the range of $13 billion to $17.5 billion.
Further information will be provided in bp’s second-quarter 2020 results, expected to be released on 4 August 2020.
