By Sarah Kent and Justin Scheck 

LONDON-- BP PLC on Tuesday reported a sharp drop in first-quarter profit compared with a year earlier and saw its cash flow squeezed as oil prices hit their lowest mark in six years.

BP managed to avoid the huge losses it experienced last quarter, turning a $2.1 billion replacement-cost profit--a number similar to the net income that U.S. oil companies report--down from $3.48 billion a year earlier.

The company was aided by a U.K. tax break for companies operating in the North Sea and its downstream business--which includes refineries, chemicals production and retail gas stations--showed a healthy profit. But BP's revenue fell to $54.9 billion from $75.1 billion from a year earlier and its cash flow plummeted to $1.9 billion from $8.2 billion.

The company's earnings Tuesday come at a time of uncertainty for the British energy giant. Still reeling from the 2010 Gulf of Mexico oil spill, BP has become the subject of takeover speculation, with the U.K. government recently signaling that it would block any acquisition of the company.

The results reflect a sharp decline in oil prices since last June to a level many in the industry hope marked their nadir. Brent crude averaged $54 a barrel in the first quarter of the year, half its level for the same period a year earlier, BP said.

The lower oil prices dented BP's upstream performance. The company's U.S. operations reported a replacement cost loss of $616 million, hurt by rig cancellation costs as it reins in its offshore drilling expenses. Elsewhere in the world, the company's profits were a quarter of their level a year earlier.

However, the company's downstream business performed much better than a year earlier.

"We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices," BP Chief Executive Bob Dudley said in a statement. "Our results today reflect both this weaker environment and the actions we are taking in response," he said.

BP didn't say how much it benefited from a U.K. tax break for oil companies tucked into the Tory budget plan last month. It cut the supplementary charge on oil and gas companies' profit from 30% to 20%, reversing an increase made in the 2011. The supplementary charge is levied over and above regular corporation tax.

The company's results were "slightly better than expected," said Kim Fustier, an analyst at Edison Investment Research. "However this was largely thanks to one-off positive U.K. tax effects...rather than stronger underlying performance."

The oil major has already committed to cut capital spending this year to $20 billion in the face of weaker prices. Organic capital spending in the first quarter amounted to $4.4 billion, down from $5.4 billion in the first quarter of 2014.

The company is also continuing with its plan to divest $10 billion of assets before the end of the year and has already completed $7.1 billion in sales. The divestment program follows a much larger $38 billion downsizing in the wake of the Gulf of Mexico oil spill in 2010.

Mr. Dudley added that BP would continue to look to take advantage of any opportunities to further cut costs or capital expenditure as a result of the lower oil price environment.

BP announced a steady dividend of 10 cents a share and said it remains committed to maintaining payments to shareholders.

Write to Justin Scheck at justin.scheck@wsj.com and Rory Gallivan at rory.gallivan@wsj.com

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