The green that counts most to shareholders is money paid in dividends
The green that counts most to shareholders is money paid in dividends © REUTERS

BP flaunts the colour green in its corporate logos. A hopeful outlook has instead depended on brown stuff: oil. On Monday, the energy giant slashed optimistic expectations for crude, writing down up to $17.5bn of its asset base this quarter. Because of climate change, BP believes a portion of its assets are “stranded assets” — hydrocarbons that can never be burnt.

Bernard Looney, the new boss at BP, is more upfront than some peers in stating that meeting climate change targets is triggering financial charges. There will be plenty more where these ones came from. Earlier this year, Lex estimated big energy groups will have to write off $900bn at current prices.

Dealing with this will be the job of a new generation of energy industry bosses, of which Mr Looney is an early example. The long-term impact on oil prices can only be bad. The medium-term effect is debatable. Bob Dudley, Mr Looney’s predecessor at BP, thought oil prices might even soar.

BP had been forecasting the highest long-run prices for Brent crude among most European peers. It was touting $90 a barrel by 2025. The oil major has cut that by a third, taking it to the bottom of its peer group according to Barclays.

Coronavirus has trashed demand for oil. Brent prices averaged over $60 a barrel last year. Crude is down by half this year so far.

By the end of 2020, BP would most likely have needed to recognise the weak outlook in its accounts. It has done so earlier.

The charges do not affect operating cash flow. But they do hit the balance sheet, erode shareholders’ equity and increase gearing. BP is worried about its credit rating. Here what really matters is net debt relative to operating cash flow.

The green that counts most to shareholders is money paid in dividends. They are anxious about the sustainability of the payout, as shares yielding 10 per cent show. Last year dividends absorbed more than $7bn of free cash flow, of which there was plenty. This year, there is no a surfeit.

Given BP’s new outlook for crude prices, it can hardly borrow to meet the payout. The group will struggle to hold its dividend as the year progresses. The broader picture is that oil businesses failing to switch into renewables are destined for a slow run-off.

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

Get alerts on BP PLC when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article