Sure, climate change is going to reduce usage, there will be stranded assets in the future. The real importance of this episode is to our view of the wider fossil fuel markets. The one thing to look out for is a cut in the dividend which is possible but I rate as less than likely. More about resetting the baseline for the new CEO than anything else. My viewĪs far as BP itself is concerned, this writedown is a bit of a nothingburger. I rate the dividend as staying for the time being but acknowledge I could be wrong. So, problems over covenants and so on disappear. These count as equity if that's what they wish to do. It's also true that they've just launched a $12 billion bond issue of perpetuals. They don't need to cut it, have to do so, they can if they wish, though. Slim evidence, I know, but it is actually a choice here for the company and that's the sort of thing that will influence that choice. A dividend cut doesn't do that - therefore, I don't think it will happen. In my reading, this writedown is largely to make the new CEO look good. Which it might but my read is that it won't. But it makes the debt to equity ratio look worse and so it might prompt a dividend cut. Not directly of course, it's a non-cash issue. There is talk that this writedown threatens the dividend. Sure, that's cynical, but we do have a word for this, kitchen sinking. Or, possibly, anchors expectations nice and low so that his performance in the future will look good. Who is writing down every possible mistake and error made in his predecessor's term in office so that he starts with a clean sheet. 'Under new chief executive Bernard Looney, BP is undertaking an overhaul of its business as it seeks to become a leaner organisation and a net zero-emissions company.'

Sure, dress it up in climate change and COVID but here: Well, yes, there's a two-word phrase that nicely explains what is really happening here. And even then it still doesn't make a difference to current price because of that discount rate. PP&E is the pipelines, refineries and all that, exploration intangibles isn't the reserves already found and being exploited, it's those being found and confirmed. 'However, BP currently estimates that non-cash, pre-tax impairment charges against property, plant & equipment (PP&E) in the range of $8 billion to $11 billion, and write-offs of exploration intangibles in the range of $8 billion to $10 billion, will be reported in its second-quarter 2020 results. It still doesn't make much difference to the current price. OK, we even think it's going to be fewer years than we used to. 'In addition, with the COVID-19 pandemic having continued during the second quarter of 2020, BP now sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.īP's management also has a growing expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system, as countries seek to 'build back better' so that their economies will be more resilient in the future.' Simply because of the discount rate we all use to value two decades out. There is not about to be some imminent collapse in fossil fuel company prices as a result of climate change worries two decades out. So, the stranded assets problem has been tested for us. BTW, it's the second explanation that is true there. That is, either we'd all already discounted the problem or the discount rate we use means that things decades out have no net present value. Yes, OK, we can see the announcement there, but still, that is pretty much nothing and swiftly recovered from. They announced a $17.5 billion impairment of those future values, and the stock did what? Well, pretty much nothing in fact: At which point, the BP (NYSE: NYSE: BP) testĪ week after I pointed all this out, BP comes along and tests the contention for us. That is, there will be stranded assets, sure there will be, but they'll make near no difference to current stock prices.

Therefore, changes in that future value don't change present valuations very much. In short, though, the contention on the other side - my side - is that if we use market discount rates to value the future, then things that will happen 15 to 30 years out in the future don't have much net present value. The problem with that is as I explained just last week, this is to ignore how we calculate net present values. The political claim then goes on to be that because those future values will fall, the stock prices will fall right now.

We've also watched it happen to coal and it's entirely certain that it's going to happen to those other two fossil fuels. The stranded assets idea is that we'll all use less oil and gas in the future, therefore the oil and gas we'll use in the future is worth less.

Writedown of equipment