The collapse in oil prices in recent weeks, as global demand has fallen off a cliff due to the coronavirus pandemic, is likely to hit BP extremely hard – with the first real evidence of this in its Q1 results, out at 7am on Tuesday.

US WTI crude oil has plummeted from over $63 a barrel as the year got underway, with the May contract dropping to negative levels as low as -$37 last Monday, as demand woes and oversupply fears took hold of the markets. Even the June contract fell sharply, close to levels last seen in the 1990s, suffering its largest intraday loss since 1982. And this historic price fall followed on from the oil market’s worst quarter on record.

BP’s share price plunge

BP’s share price slipped to its lowest levels since the mid-1990s in March, down to 222.9p – that’s a decline of over 50% from where BP shares begun 2020 – and even further away from its 52-week high point at 570p, achieved a year ago. With each passing week, BP’s acquisition of BHP Billiton’s shale assets a couple of years ago, for $10bn, looks more and more foolhardy.

The falling out between Russia and Saudi Arabia has made matters even worse for the UK oil and gas giant, while the slide in US shale prices is likely to have exacerbated the problems at its US operations. The disagreement is based around a refusal from Russia to cut oil production as part of efforts from Opec to prop up prices. This has subsequently prompted Saudi Arabia to increase production, while at the same time reducing the official selling price for crude exports.

In terms of US shale, it was anticipated that the industry would expand by 650,000 barrels per day this year, but that estimate was before the coronavirus outbreak, which has triggered the severe declines in oil prices. US shale production is now forecast to shrink by 1.5m barrels a day this year compared with 2019, but it could ultimately been even more severe.

The collapse in US crude prices to levels last seen in early 1999 has prompted speculation that the US may bail out the shale industry in the face of a collapse in demand, and a lack of storage capacity, as stockpiles continue to rise sharply, amid fears that some US shale producers could go bust. While Opec+ has already agreed to a cut of 10m barrels a day, the global collapse in demand of over 20m barrels a day could overwhelm the weaker members of the US shale industry, which has breakeven prices of over $40 a barrel. 

Shareholders facing dividend cut

While the company can cut capital expenditure in the hope of covering costs on a short-term basis, there have to be questions about the sustainability of a dividend yield which currently sits above 10%. With a gearing of over 30% and a breakeven price of just below $50, a sustained period of lower oil prices is going to be painful, and could mean that shareholders might have to absorb a dividend cut. This could well have a negative effect on BP’s share price, at least in the short term.

While demand falls as airlines cut capacity and people travel less on advice to work remotely and stay indoors, the longer-term outlook is likely to be constrained by environmental issues. This will present a clear challenge to oil majors like BP and Royal Dutch Shell, who have been well behind the curve in preparing their business models for a lower carbon world.

Read our BP Q1 results analysis here

 

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