By Sarah Kent 

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, delivering 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 on 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.

"We are going through massive changes in the industry. We continue to believe the oil prices will remain soft," BP's CFO Brian Gilvary said on a conference call Tuesday addressing the company's first quarter performance. He declined to comment about the government moving to block a takeover bid.

The lower oil prices dented BP's earnings on the discovery, production and sale of crude oil and gas--known as its upstream division. The company's U.S. operations reported a replacement cost loss before interest and tax 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.

The weak results in its upstream division were partly to blame for the company's severe cash slump. It also had to pay $600 million to the U.S. Department of Justice related to the 2010 Gulf of Mexico disaster, and BP tied up a large amount of cash in oil storage for trading purposes.

The slump in oil prices has resulted in a market condition known as contango, where current oil prices are cheaper than those in the future. That allows traders to store oil they bought at low prices while locking in a profit by selling pricier futures. As BP unwinds its position throughout the year more cash should return to its balance sheet.

BP rarely provides details of its huge trading arm's quarterly performance, but its results were $300-$400 million better than normal. That fed into a sharp increase in the company's downstream profits, which were also bolstered by stronger refining margins.

Despite the cash crunch, BP said it would maintain its dividend at 10 cents a share.

BP officials said they would continue a push to make the company leaner--a drive that began after the Gulf of Mexico spill and shoved further along by low oil prices. The company's capital spending fell in the first quarter by almost 20% and officials said they were well along with a plan to sell $10 billion of assets this year, following a much larger $38 billion downsizing in the wake of the oil spill.

BP Chief Executive Bob Dudley said in a news release that the company was "resetting and rebalancing to meet the challenges of a possible period of sustained lower prices."

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 Gulf spill still looms over the company, which is still waiting to hear on from a Louisiana deferral court on liabilities relating to the spill that could mount as high as $13.7 billion. The company's total charge to date for the spill is $43.8 billion.

Justin Scheck contributed to this article

Write to Sarah Kent at sarah.kent@wsj.com

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