BP warns on profits; Writes down $1bn, cuts capex, shale output

Oil giant BP said it would write down around $1bn and cut capital expenditure in the first quarter as it warned of a profit hit from the slump in demand as countries implemented measures to address the Covid-19 pandemic.

The company on Wednesday said capital expenditure would be cut by 25% to around $12bn and cautioned that the "challenging environment is expected to have an impact on our first quarter results" with further uncertainty around how long current depressed commodity pricing and weakness in product demand would continue.

"This may be the most brutal environment for oil and gas businesses in decades," said chief executive Bernard Looney.

The capex cut included a $1bn reduction in investment in the company's BPX shale business bought from Australia's BHP for $10.5bn in 2018. Output at the unit would fall by about 70,000 barrels of oil equivalent per day (boed) in 2020.

First quarter upstream production is expected to be lower than fourth-quarter 2019 in a range of 2,550-2,600m boed a day, reflecting the growing decline in demand for fuels, jet fuel and lubricants as countries shut their borders and restrict internal movement to stymie the spread of the coronavirus.

BP stuck to its $15bn divestment target, but noted that proceeds may be phased as transactions complete. The company expected the sale of sale of its Alaskan business to Hilcorp to complete in 2020.

The impact of the stronger US dollar on deferred tax balances was also expected to significantly increase BP's underlying effective tax rate in the first quarter relative to full year guidance, the company said.

Analysts at RBC Capital said it expected the first quarter guidance to be taken negatively by the market, given the “significant increase” in the underlying tax rate, with no material working-capital benefit and the impairment charge likely to leave the balance sheet looking more stretched than its peers.

"We recently downgraded BP to 'underperform', and we see the balance sheet as more stretched than peers. Capex cuts and potential divestments could help protect dividend payments in the near term, however we remain sceptical that divestments will be completed in the current environment," the bank said in a note.

It also said it did not expect the Hilcorp deal to complete this year and had "removed the divestment from our numbers and added back the production, earnings and cash flows".