British Petroleum, one of the world’s largest integrated oil companies, announced last week that it will write down the value of its fixed assets ($191 billion at yearend 2019) by $13-$17.5 billion. The reasons: a drop to $55 a barrel in its estimate of the future price of oil; plus its assessment that the world will turn away from fossil fuels more quickly than it had previously thought.
The BP stock price barely moved on the news, so it was no surprise.
The stock has been trading at around 80% of the balance sheet value of shareholders equity (translation: what shareholders would get if the company were instantaneously liquidated at the values listed on the balance sheet for assets and liabilities)–meaning investors already assumed that balance sheet asset values were too high.
It seems to me that the reasons for the announcement are: to underline to investors that BP intends to be an energy company, not an oil company; and to set internal company expectations and priorities.
For what it’s worth, I think this is the right path to take. The pandemic has likely made the integrated oils’ task more difficult, though. Demand for jet fuel is likely to remain depressed for some time. And gasoline sales in the US, the world’s most profligate user of petroleum products, are likely to remain damaged as a hapless (self-destructive?) president contrives to spread the pandemic through the nation’s vacation spots.
–although accounting rules require writedowns as soon as a company realizes the value of some of its assets is impaired, my experience is
they mostly occur at times like now, when enough other stuff is going on that they won’t be noticed
–one benefit to a writedown in bad times is that won’t detract from a future good earnings report
–accounting rules also say that the balance sheet value of impaired assets can’t be reduced to below fair market value–thus manufacturing a future profit if they’re sold. If I were BP, though, I’d want as low a value as my accountants would permit
–writedowns like this are financial accounting actions. In themselves, they have no effect on the company’s real world operations or their tax books. It isn’t until an asset is sold or otherwise disposed of at a loss that the loss can be used to reduce taxes. So a potential tax deduction can be preserved indefinitely by not selling the asset even though it no longer appears on the financial reporting balance sheet.