By Sarah Kent
LONDON-- BP PLC on Tuesday swung to a loss in the second
quarter, as earnings were hit by lower oil prices and a
multibillion-dollar charge relating to the deal it reached earlier
this month to settle U.S. federal and state claims over the 2010
Deepwater Horizon disaster.
The U.K. oil giant said its replacement cost loss--a number
analogous to the net income that U.S. oil companies report--was
$6.27 billion, compared with a profit of $3.18 billion a year
earlier. The sharp decline includes a $9.8 billion pretax charge
that BP recorded as part of an $18.7 billion agreement with the
U.S. government and five states to settle legal claims relating to
its Deepwater Horizon fatal oil spill in the Gulf of Mexico. The
net charge recorded by the company for nonoperating items amounted
to $7.5 billion.
It was the second time in the past six months that BP posted a
quarterly loss, reflecting how deeply the oil-price slide has
affected its operations and the mounting cost the Deepwater Horizon
spill continues to exact. The company has slashed spending this
year, delaying projects with reserves of over 3.5 billion barrels
of oil and gas--more than any other big independent energy company,
according to Wood Mackenzie.
The last five years have taken their toll on the company, which
sold off more than $40 billion in assets to raise cash for
oil-spill cleanup and legal costs. So far the incident has cost the
oil giant nearly $55 billion in pretax charges and it remains
embroiled in lawsuits relating to the spill, but the deal struck
earlier this month settles the largest claims against the oil giant
and gives BP far more certainty over the ultimate size of its
liabilities.
While the settlement will give the company more room to
maneuver, the weak oil price will keep the pressure on.
BP's chief financial officer Brian Gilvary warned that the slump
in oil prices isn't over yet. He said the company was positioning
itself for a world in which oil prices remain "lower for longer,"
after the market tanked last June.
Though prices rebounded somewhat in the second quarter, they've
fallen back in the past month after a nuclear deal with Iran raised
the prospect of more supply in the coming months.
"We haven't yet seen the full affect come through," Mr. Gilvary
said, noting that the Iranian barrels probably won't hit the market
until next year.
Light, sweet crude for September delivery closed down 75 cents,
or 1.6%, at $47.39 a barrel on the New York Mercantile Exchange on
Monday, the lowest settlement since March 20.
BP's upstream arm, which focuses on oil production, reported
pretax earnings of $0.2 billion in the second quarter, down from $4
billion in the same period a year earlier. Lower prices had a
particular impact on BP's earnings from its stake in
state-controlled Russian oil company OAO Rosneft. Its underlying
net income from the company fell by nearly 50% in the second
quarter of 2015 to $510 million from $1 billion a year earlier. The
company's upstream results were also affected by a $600 million
charge relating to its exploration activities in Libya, where the
company has been unable to operate because of political upheaval
amid a continuing armed conflict.
"The external environment remains challenging, but BP moved
quickly in response and we continue to do so," said Chief Executive
Bob Dudley. "I am confident that positioning BP for a period of
weaker prices is the right course to take, and will serve the
company well for the future."
The company has already announced plans to cut spending in
response to lower prices and organic capital expenditure for the
whole year is now expected to be below $20 billion. Meanwhile, the
company continues to maintain its focus on simplification and
efficiency programs intended to help control costs. Its total cash
costs to date this year are estimated to be around $1.7 billion
lower than in the same period of 2014. Its gearing, the ratio of
debt to equity, also remains within the company's 10%-20% target
band and net debt fell to $24.8 billion at the end of the second
quarter, $293 million lower than at the end of the first three
months of the year. The company maintained its dividend at 10 cents
per ordinary share.
"We can see clear progress in our capital program and from our
work to reset and reduce cash costs. Our focus remains on
rebalancing the company's sources and uses of cash in a lower price
environment," said Chief Financial Officer Brian Gilvary.
Despite the tough environment created by low oil prices, BP did
receive some support over the last quarter from its refining arm.
Refineries have enjoyed months of extraordinarily high margins
thanks to weak crude prices and rising demand. BP's downstream
business, which includes refining and marketing, saw pretax
earnings increase by nearly 75% in the second quarter to $1.6
billion compared with $933 million a year earlier.
Write to Sarah Kent at sarah.kent@wsj.com
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