By Sarah McFarlane and Christopher M. Matthews 

LONDON -- BP PLC returned to profit in the fourth quarter but said the pandemic, which battered the oil-and-gas industry in 2020, would continue to challenge its business this year.

Covid-19 has sapped demand for oil, hitting prices, and prompted the world's biggest energy companies to slash spending, cut jobs, write down the value of their assets and -- in the case of BP and Royal Dutch Shell PLC -- lower dividends. The crisis led U.S. oil giants Exxon Mobil Corp. and Chevron Corp. to discuss a merger, according to people familiar with the matter, although the talks didn't progress.

BP said Tuesday its earnings had suffered from weaker gas marketing and trading results, while refining margins and utilization remained under pressure. However, this was partly offset by income from asset sales, including some proceeds from the $5 billion sale of its petrochemicals business to Ineos Ltd.

The company reported a replacement cost profit -- a metric similar to the net income figure that U.S. oil companies report -- of $825 million for the three months ended Dec. 31, from a loss of $4 million in the year-earlier period. For the full year, it reported a loss of $18.1 billion, from a profit of $3.5 billion in 2019.

BP said Covid-19 restrictions would continue to sap demand early in 2021 and that the pandemic may have an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.

Still, Chief Executive Bernard Looney said the company expects demand to stabilize this year, although the speed and degree of the recovery is uncertain.

"It's all dependent on vaccine rollouts, vaccine efficacy and OPEC compliance," Mr. Looney said in an interview. Unlike its U.S. counterparts, Mr. Looney said that BP hadn't spoken to any of its peers about mergers, and that it was focused on executing its strategy to pivot toward low-carbon energy.

BP's shares traded 3.1% lower in London on Tuesday as the results came in below analysts' expectations.

Other oil companies are also feeling the strain. Last week, Chevron Corp. reported a quarterly loss, capping its worst annual performance since 2016.

Exxon is expected to report a fourth consecutive quarterly loss later Tuesday, followed by Shell's earnings on Thursday. Both companies have signaled large write-downs, with Exxon expected to reduce the value of certain assets by as much as $20 billion.

The pandemic has already triggered the largest revision of the value of oil-and-gas assets in at least a decade, as companies sour on costly projects amid the prospect of low prices for years.

BP has suggested demand for fossil fuels may never fully recover and that the pandemic could accelerate the pace of transition to a lower-carbon economy.

Under Mr. Looney, BP has embarked on a plan to reduce its dependence on oil and gas, while increasing investments in low-carbon energy like wind and solar power.

French energy giant Total SE has also outlined plans to build up its renewables business, while Shell has signaled its intention to set out a similar path later this month.

"An unprecedented demand collapse has forced the hand of Big Oil to right-size their dividends and capital frames; meanwhile plans for energy transition have been accelerated," said Christyan Malek, an analyst at JPMorgan.

However, Exxon and Chevron haven't set out plans to invest substantially in renewables, instead choosing to double down on oil and gas. Both companies have argued that the world will need vast amounts of fossil fuels for decades to come, and that they can capitalize on current underinvestment in oil production.

The U.S. companies plan to invest in carbon capture and storage, which gather carbon emissions from industrial processes, or directly from the air, and deposit them underground. Some see such technology as a way to lower the carbon footprint of fossil fuels, potentially allowing producers to continue pumping oil and gas as some countries tighten regulations on emissions.

On Monday, Exxon said it would form a business unit focusing exclusively on technologies to reduce carbon emissions, investing about $3 billion through 2025, primarily on carbon-capture projects.

Rebecca Fitz, a senior director at Boston Consulting Group, said she thinks both the European and American strategies can work, but both must deliver better returns and produce less carbon to be palatable to investors.

"When you have less capital, choices around how you allocate that capital are more stark," Ms. Fitz said.

Exxon's shares have fallen nearly 28% over the past year, with Chevron's down about 19%. BP and Shell have fared worse, with shares down 42% and 37%, respectively. Investors have expressed more faith in Chevron because it entered the downturn with a stronger balance sheet than its peers.

To bolster its finances, BP has been selling assets to reduce debt. The company said it was now more than halfway to its target of $25 billion of asset sales by 2025, helped Monday by the sale of a 20% stake in a gas development in Oman. BP aims to lower its debt to $35 billion by the first quarter of next year, down from $39 billion at the end of 2020.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com and Christopher M. Matthews at christopher.matthews@wsj.com

 

(END) Dow Jones Newswires

February 02, 2021 06:21 ET (11:21 GMT)

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