BP reports 20% lower profits in 1Q, continues divestment program

BP PLC reported that its underlying replacement cost profit for the first quarter was $2.6 billion, down from $3.2 billion for first-quarter 2014 but up from $2.2 billion for fourth-quarter 2014.

Organic capital expenditure in the first quarter was $4.4 billion. Bob Dudley, BP group chief executive, confirmed in an earnings release the company’s reset expectation of $20 billion in total organic capital expenditures for 2015 (OGJ Online, Feb. 3, 2015), and evoked the possibility of additional capex reductions to deal with lower crude oil prices.

During IHS CERAWeek in Houston last week, Dudley said he expects “lower for longer” crude prices (OGJ Online, Apr. 22, 2015). He also ruled out the possibility of BP’s involvement in a megamerger.

“We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices,” he said in the release. “Our results today reflect both this weaker environment and the actions we are taking in response.”

BP noted that the Brent crude price during the quarter averaged $54/bbl, the lowest quarterly average Brent price since first-quarter 2009 and half of the $108/bbl average during first-quarter 2014.

“We are continuing to progress our planned divestment program, we are resetting our level of capital spending, and we are addressing costs through focusing on simplification and efficiency throughout BP,” Dudley said.

BP says it remains on track to divest an additional $10 billion in assets by yearend, having sold $7.1 billion in assets thus far including last week’s agreement to sell its interest in the CATS business in the UK North Sea to Antin Infrastructure Partners SAS for $486 million (OGJ Online, Apr. 24, 2015).

Operating cash flow for the quarter was $1.9 billion, down from $8.2 billion a year earlier. The quarter’s operating cash flow included a working capital build of $2.5 billion. BP’s net debt at the end of the quarter was $25.1 billion, equivalent to a gearing level of 18.4%.

Upstream weak, downstream strong

BP’s upstream segment reported underlying pretax replacement cost profit of just $600 million for the first quarter, down from $4.4 billion for first-quarter 2014. The result included a $545 million loss for BP’s US upstream business, the primary subject of possible merger and divestment talks among industry analysts.

The company attributes the weak performance to lower oil and gas prices, weaker gas marketing and trading, and $375 million in costs associated with the cancellation of contracts for two deepwater rigs in the Gulf of Mexico no longer required for BP’s reset drilling program.

Ensco PLC and Seadrill Ltd. last month received notices from BP to respectively terminate contracts for rigs DS-4 and West Sirius.

BP says the loss, however, was partly offset by the positive impacts of higher oil and gas production, lower exploration write-offs, and cost benefits from simplification and efficiency work throughout the segment.

Overall oil and gas production, including Russia, totaled 3.3 million boe/d. Excluding Russia, upstream production of 2.3 million boe/d was 8.3% higher than a year earlier.

The company’s downstream segment, meanwhile, reported an underlying pretax replacement cost profit of $2.2 billion for the quarter, up from $1 billion in first-quarter 2014, reflecting a stronger overall refining environment, increased refining optimization and production, and improved marketing performance, the company says.

Estimated underlying net income from OAO Rosneft, of which BP holds a 20% stake, was $183 million, down from $270 million in last year’s first quarter. Dudley noted during CERAWeek that sanctions in Russia primarily impacting Arctic and unconventional operations, may not discourage possible additional investment in the country by BP.

Tax credit, miscellaneous charges

BP’s first quarter result included a one-off, noncash, deferred tax credit as a result of the reduction in the rate of the UK North Sea supplementary charge. Chancellor George Osborne announced during his fiscal speech in December that the supplemental charge rate would be cut to 30% from 32% (OGJ Online, Dec. 3, 2014).

The quarter’s result also included a further $215 million non-operating restructuring charge, bringing total restructuring charges to $648 million. BP expects to take an estimated total restructuring charge of $1 billion by yearend.

Total cumulative pretax charge for the Gulf of Mexico oil spill at quarter’s end was $43.8 billion. An additional charge of $332 million was taken in the quarter due mainly to additional business economic loss claims. BP says the overall charge does not include any provision for business economic loss claims that are yet to be received, processed or paid, except where an eligibility notice has been issued and is not subject to appeal by BP within the claims facility.

At the end of the quarter the aggregate remaining cash balance in the trust and qualified settlement funds was $4.3 billion.

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