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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