Strong second quarter provisions for BP

  •   15/06/2020 - 15h39
  •   HARMANT Adeline

Earlier this week, the oil group BP announced that it would make a significant provision in its second quarter accounts following the drop in its forecast for the price of a barrel of crude oil. Let's look back at this announcement and its effects on the stock market as well as analysts' recommendations regarding this stock.

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Strong second quarter provisions for BP
Image copyright: Martin Abegglen - Flickr

BP's announcement in detail :

The BP Group announced that its total non-cash impairment charges would actually be between $13 and $17.5 billion after tax and would be recorded in its second quarter 2020 results.

In this morning's press release, the British group thus indicates that it is now basing itself on the scenario of a barrel of Brent oil averaging $55 over the long term. For a better understanding of this estimate, it should be recalled that a barrel of Brent is now quoted at $37.5.

BP believes that the impact of the Covid-19 pandemic on the global economy will extend over the long term and confirms its intention to continue its transformation towards a leaner, more responsive and lower cost business model. The group also reiterated its desire to achieve its carbon neutrality objective by 2050.

Following this announcement, BP's share price fell on the stock market this morning and lost 5% on the London market.


Analysts' advice following BP announcement :

This morning and directly after the announcement by the BP group, analysts have expressed their views on the likely evolution of the share price of this stock as Berenberg maintains its recommendation to keep this stock. The latter indeed considers that the provisions announced by the oil group threaten in the longer term the dividend which is likely to fall.

Indeed and although BP's announcement does not represent an impact on the group's cash position, it will have a negative effect on its debt/equity ratio which was already established at a relatively high level.

According to Berenberg, impairment provisions of 15 billion could result in a debt/equity ratio of more than 40%. In addition, the energy giant could consider, in order to have additional financial leeway, significantly reducing its dividend as its competitor Shell has already done. This decision would then undoubtedly be made following the presentation of the second quarter results. Berendberg gives a target price of 320 pence.

However, it is still more prudent to wait for further information from the commodity market or the industry before deciding on a longer-term strategy on the share price. The share price should indeed continue to fall for a while but could subsequently begin to rise again.