BP’s plan to writedown up to $17.5 billion in its second-quarter earnings will have major implications in the near to long-term. So says Luke Parker, vice president, corporate analysis at consultancy group Wood Mackenzie.
“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% (including lease liabilities, 41% excluding). A US$13 billion write-down would push these figures to 44% and 40% respectively. This is uncomfortably high,” Parker said.
He pointed out that 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.”
BP’s earnings are due on Aug 4 and CEO Bernard Looney in September is set to announce his strategy to “reinvent” BP including a smaller focus on oil and gas and a larger renewables business.
“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,” Parker said.
In a statement, BP said that the aftermath of the new coronavirus pandemic would accelerate the transition to a lower-carbon economy in line with the goals of the 2015 Paris climate agreement.
“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,” Parker indicated.
That, he said, 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.”
Last week, BP said it would cut about 15% of its workforce in response to the coronavirus crisis and as part of the company’s plan to shift to renewable energy.