BP Earnings Retreat on Weaker Output, Refining

BP First-Quarter Earnings Retreat on Weaker Output, Refining
The BP Plc company logo is displayed outside the company's offices at Canary Wharf in London. Photographer: Chris Ratcliffe/Bloomberg

BP Plc, Europe’s second-biggest oil company, said profit declined 19 percent in the first quarter as asset sales lowered production and refining weakened.

Net income dropped to $5.9 billion from $7.3 billion in the first quarter of 2011, the London-based company said today in a statement. Excluding one-time items and changes in inventories, profit missed analyst estimates. Oil and gas production, including output from the Russian TNK-BP venture, slipped 3.6 percent to 3.45 million barrels of oil equivalent a day.

Chief Executive Officer Bob Dudley is trying to convince investors that BP has overcome the 2010 Gulf of Mexico oil spill by selling off assets, gaining access to deepwater and U.S. shale opportunities and raising the dividend. The company said output may slip again in the second quarter.

“These are disappointing numbers,” said Stuart Joyner, an analyst at Investec Securities Ltd. in London. “They’re in between disposals taking earnings down and new growth opportunities coming through.”

Adjusted first-quarter earnings fell to $4.8 billion from $5.5 billion a year earlier. The average estimate of 11 analysts surveyed by Bloomberg was for profit of $5 billion on that basis. The company maintained the dividend at 8 cents a share after raising it from 7 cents for the fourth quarter.

Shell, Exxon

Royal Dutch Shell Plc, Europe’s largest oil company, last week reported profits that beat expectations as output rose, and it raised its target for asset sales. Exxon Mobil Corp., the world’s biggest energy company, said profit fell 11 percent on the biggest drop in production since 2008.

BP fell 0.8 percent in London. The shares are down more than 30 percent since the spill.

The Macondo blowout killed 11 workers and caused the worst offshore oil spill in U.S. history. BP still faces a trial over liability for the disaster with the U.S. Department of Justice after agreeing to pay at least $7.8 billion to victims of the spill in March.

“The real challenge is at what point the Department of Justice problems are going to be washed away,” said James Bevan, chief investment officer at CCLA Investment Management Ltd., in an interview on Bloomberg Television. “The shares aren’t going to rise materially until that news is out of the way.”

Asset Sales

Chief Financial Officer Brian Gilvary said the company remains prepared to settle with the government on reasonable terms. He declined to comment further on the talks or the trial in a conference call with analysts.

BP said in February that production would be “broadly flat” this year after the Gulf of Mexico spill forced the company to shut down fields for safety reviews and sell assets to raise cash. It’s targeting total asset sales of $38 billion by the end of next year after about $23 billion of divestments so far. About 120,000 barrels of oil equivalent capacity a day will be sold this year.

The company said today it plans to sell some “non-strategic” assets in the Gulf of Mexico, including stakes in the Marlin, Horn Mountain, Holstein, Ram Powell and Diana Hoover fields. The assets produced about 50,000 barrels of oil a day last year.

Production Outlook

Production excluding TNK-BP fell 6 percent from a year ago to 2.45 million barrels of oil equivalent a day. The company expects output to decline in the second quarter and for costs to be higher due to seasonal maintenance.

“Results continue to be impacted by the loss of high-margin barrels from the Gulf of Mexico and by increasing production costs,” Oswald Clint, an analyst at Sanford C. Bernstein & Co. in London, wrote in a note. “Upstream will get worse before it gets better.”

Brent crude averaged $118.45 a barrel in the first quarter, compared with $105.52 a year earlier. BP estimates its earnings rise $300 million a year for every $1 gain in Brent crude.

The company plans to dispose of the Texas City and Carson refineries by the end of this year. Profit in the refining and marketing division slipped to $2.3 billion from $4.4 billion a year earlier. The company expects margins to widen in the second quarter.

Global margins have improved since the end of March. BP’s refining marker margin stood at $15.04 a barrel in the second quarter to date, compared with $11.60 in the first quarter, according to the company’s website. The company’s profits gain about $650 million a year for every $1 increase in the margin, according to rules of thumb on BP’s website.

BP has had talks with the Department of Justice about a settlement for pollution claims that can reach as much as $17.6 billion. The company is set to complete payments into the $20 billion trust fund for victims this year.

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