Company / Analytics

Analytics, 16 June 2020

BP takes a hit and ditches oil exploration project

Markets have been volatile since the outbreak of Covid-19. The past weeks have seen states across the world eases restrictions and allow the gradual resumption of economic activities, all of which resulted in some gains in the stock market; even though the market had remained relatively bearish despite the economic impact of the COVID-19 pandemic. But just when hopes were high that Covid-19 is becoming contained, new outbreaks are emerging, dimming hopes of a quicker recovery.

Last week major US stock indices tumbled due to volatility and the pessimistic outlook of the future by the Federal Reserve, which saw the Dow had its worst day since March, shedding 1,862 points, or 6.9%, the S&P 500 also dropped 5.9%, while the Nasdaq fell 5.3%. The broad-based sell-off dragged down nearly every category of stocks.

This week markets will continue to react on a wave of new infections in China and in US states such as Arizona, Texas, and Florida where authorities are considering re-instating lockdown conditions after higher infection numbers were reported.

The volatility in the stock market will remain and riskier assets will particularly be affected. The oil market has been volatile, and oil traders have been impacted by the over-supply of oil and the drop in demand brought about by the shutdown of factories and restrictions on travel, among others.

BP takes a hit and ditches oil exploration projects

On Monday this week, global oil and gas giant BP lowered its oil price expectations through to 2050, noting that the post-COVID-19 environment will accelerate the transition to a lower-carbon economy and energy system.

For the oil market, BP expects the international benchmark Brent crude futures to average around $55 a barrel from 2021 through to 2050, with Henry Hub gas prices forecast to average $2.90 over the same period. Henry Hub is a natural gas pipeline located in Erath, Louisiana, that serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX).

As a result of the new price forecasts, BP has decided to write off up to $17.5bn of its assets, including $8bn-$10bn of its “exploration intangible assets.” These are oil and gas fields that haven’t yet been assessed for future production. BP expects to release its Quarter 2 results for 2020 on August 4, during which it will provide a precise assessment of the impact of the revised impairment, testing price assumptions on the group’s financial statements.

BP shares fell 5.6% to $23.36 in Monday’s pre-market trading in London. Brent crude futures traded at $38.11 a barrel on Monday morning while in the US the WTI futures stood at $35.20.

BP was already reviewing its portfolio and capital development plans as part of its ambition to become a zero-net company by 2050 or sooner. In mid-February, BP CEO Bernard Looney laid out a new direction for the company in a statement entitled: “Reimagining energy, reinventing BP” which outlined BP’s ambitions to become a net-zero company by 2050 or sooner. BP’s plans in this regard include cutting the carbon intensity of products it sells by 50% by 2050 or earlier; installing methane measurement at its major oil and gas processing sites by the year 2023 and halving the methane intensity of operations, and upping the proportion of its investment in non-oil and gas businesses.

For BP, the COVID-19 outbreak has added to the challenge for oil outlooks in the future and reminded people of the frailty of the ecosystem, where renewable stocks are becoming attractive propositions for investors.

BP’s commitment to cut carbon emissions to net-zero by 2050 is encouraging and a clear indication that BP will be able to adapt and survive. The resets will come both from existing oil and gas fields and from those in places like the Gulf of Mexico and Canada where the company has undeveloped holdings that it may decide not to exploit in the current circumstances.

What next?

The market is expected to remain volatile especially with the renewed fears of a second wave of infections. But the world is now better equipped to deal with a full-blown second-wave; it’s not like the first time when little was known about Covid-19.

The chances of shutting down entire countries or the world economy are little, especially after the current wave of reopening, but investors are right to be concerned that it may happen.

The market tends to react to good news on coronavirus vaccine, and the moment we get more positive announcements about a coronavirus vaccine, the stock market is likely to roar once again as the bulls stand ready to take their vengeance.

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