BP results show strain of Russia, US spill

Updated 11:31 AM Aug 01, 2012

LONDON - BP cemented its status as problem child among the world's top oil companies yesterday with unexpectedly weak quarterly results, slashing US$5 billion (S$6.2 billion) off the value of its United States assets and undershooting forecasts at operating level.

The British oil company, struggling under the weight of litigation over the 2010 US Gulf oil spill and a row with its Russian partners, said both oil production and refining margins fell in the second quarter and would fall again in the third.

Analyst Richard Griffiths of Oriel Securities said the figures were "testing the faith" of investors and on a divisional basis "missed (expectations) at every level".

Shares in western Europe's second-largest oil company were down 4.5 per cent at 424 pence at 1135 GMT, by far the biggest faller of the day among European oil stocks.

The US$5 billion charge included US$2.7 billion for the declining value of US refineries and a US$2.1 billion two-part write-down of US shale gas assets, which have been hit by a slump in prices, and to take account of suspension of the Liberty project in Alaska.

BP abandoned Liberty earlier in July, saying the field looked likely to cost more than the US$1.5 billion it had planned to spend there.

The shale gas and refinery write-downs are no surprise. Others have being doing the same amid weak fuel manufacturing margins and with US gas prices near 10-year lows, below cost for some operators of shale fields.

Shale technology using underground "fracking" explosions and horizontal drilling is wringing gas from reserves previously thought unrecoverable, but its relatively high cost has made it a victim of its own success as a glut develops in the US.

But BP also booked an extra US$847 million provision for the 2010 US Gulf oil spill, bringing the total set aside for the disaster to US$38 billion, or well over two years' worth of profits at current prices.

Investors are hoping for a deal with US authorities before the US elections, but BP warned there was still "significant uncertainty" with regard to its potential obligations there.

BP is also in dispute with the co-owners of TNK-BP, who on Monday blocked the payment of dividends from the business that provides 29 per cent of BP's output, and it knows it will not be forgiven any other hiccups while those problems weigh on its share price.

"Until we are able to resolve one or both of those issues we will continue to have a higher level of uncertainty over the company," Chief Executive Bob Dudley told reporters after the results.

Even before yesterday's slide, BP shares traded at just 6.9 times forecast earnings, compared with an average of 10.3 times for the 30 companies in the Dow Jones Global Titans index, and well below the ratio commanded by industry number one ExxonMobil at 11.5.

Charges tipped BP into a loss for the quarter of US$1.4 billion. Adjusted for the charge and other one-offs, profits on a replacement cost basis were US$3.7 billion, down from US$5.7 billion a year ago and below expectations of around US$4.4 billion.

Analysts said an unexpectedly large loss of output as a result of maintenance in the high-profit offshore US Gulf - a problem that also hit rival Royal Dutch/Shell in the quarter - was partly to blame for the miss.

They had also underestimated the impact of a tax lag on Russian production, which affected the profits of BP's Russian joint venture, TNK-BP, to the tune of about US$700 million.

The company said it still sees a "significant uncertainty" over US oil spill obligations but that it was in "advanced talks" to sell Texas City and Carson, the two US refineries it has earmarked for disposal, and would get them off the books by the end of this year as planned. REUTERS