BP likely to cut dividend after price revisions - Berenberg

Oil giant BP was likely to cut its dividend at second quarter results in August after lowering long term oil and gas price forecasts and writing off $17.7bn in assets, broker Berenberg said on Monday.

The move would "push gearing above 40% for the group, putting further pressure on the balance sheet", Berenberg said in a note to clients, adding there was "an increasing probability of a dividend cut at BP to give breathing room to the balance sheet and enable greater investment and a swifter transition into lower carbon businesses".

"While the write-offs are non-cash, they do affect gearing, and would drive a significant increase in net debt/equity from an already elevated level."

"On our estimates, $15bn of impairments would increase gearing from 36.2% at end-Q1 to 40.5%, all else being equal. It will also likely incentivise the company to accelerate its divestment programme where possible to curb net debt," Berenberg said as it rated the stock a 'hold' with a price target of 320p.

The oil giant's revised long-term price assumptions were now an average of around $55 per barrel for Brent and $2.90 per million British thermal units for Henry Hub gas from 2021-2050.

First quarter profits slumped by 66% on collapsing oil prices and “demand destruction” caused by the coronavirus pandemic although the company still decided to retain a dividend, surprising many in the markets, especially as rival Shell cut its payout for the first time since World War II.

BP also said the aftermath of the coronavirus pandemic would accelerate the pace of transition to a lower carbon economy and energy system in line with the goals of the 2015 Paris climate agreement.

"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," said chief executive Bernard Looney.

“We are also reviewing plans for some of the exploration prospects on our books,” the company said on Monday, adding that it was assessing the carrying values of intangible assets.

The new price assumptions would result in second quarter post-tax non-cash impairment charges and write-offs of $13bn - $17.5bn. Some oil and gas projects at early exploration stages would also be reviewed.

"The revised average price assumptions for Brent oil and Henry Hub gas for the next 10 years are lower by approximately 30% and 16% respectively," BP said.