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UBS says extent of BP write-offs look disproportionate

The Swiss bank is now forecasting a dividend cut, potentially in the second quarter.

BP PLC - UBS says extent of BP Plc write-off looks odd

UBS has retained a ‘buy’ rating for BP Plc (LON:BP) despite the shock that it is set to write off between US$13bn and US$17.5bn as it digs in for a predicted enduring impact in the wake of the coronavirus (COVID-19) pandemic.

Decarbonisation is also a factor for BP’s outlook as it yesterday set its long term oil price assumption at US$55 per barrel, which it said is in-line with an energy transition that’s compliant with the Paris environmental accords.

The Swiss bank may be sticking with a positive rating but at the same time is has lowered its expectations, moving its price target to 370p from 400p.

READ: BP set for massive write-offs

Analyst Jon Rigby, in a note, said: “We have no particular issue with the new price assumption. Indeed, it is in line with the low end of the range of prices previously used by BP to appraise projects, and is consistent with our oil price view.

“However, alignment of project appraisal pricing with prices used to assess carrying values looks odd to us.”

“We are also troubled by the scale of the write-downs which appear disproportionate versus previously disclosed sensitivity and the capital employed in the segment; and arguably raises issues concerning the investment process given the new price assumption doesn’t look obviously extreme.

“This is a relevant issue, in our view, as the company seeks to pivot towards low carbon & renewables - a business in which BP has less experience and knowledge, and may prove more competitive.”

Rigby also noted that the write-offs and repositioning may trigger gearing to spike above 40%, above BP’s target of 20-30%, and he sees no obvious route to quickly return gearing back to target, so shareholders may pick up the tab.

A dividend cut is now more likely, the UBS analyst said, and he is now forecasting a Q2 dividend of 6 cents per share down from 10.5 cents.

Quick facts: BP PLC

Price: 255.05 GBX

Market: LSE
Market Cap: £518.04 m

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