BP profits plunge on massive asset write-down

by on July 31, 2012 12:00 am BST

BP profits plunge on massive asset write-down


LONDON–BP Tuesday posted a dramatic fall of 96% in adjusted profit for the second quarter as it wrote down the value of its assets by $5 billion, including some U.S. refineries, a suspended Alaskan oil project and U.S. shale gas resources. Excluding these one-off costs, analysts said the company’s performance was still weak as it continues to suffer the long-term effects of the Deepwater Horizon oil spill.

BP shares dropped sharply in morning trade after the company said its replacement cost profit, a headline figure that strips out gains or losses from inventories, fell to $238 million, from $5.41 billion in the same period in 2011.

The London-based energy giant’s bottom line made for even more sombre reading as it posted a net loss of $1.39 billion, compared with a net profit of $5.72 billion a year earlier.

“We recognize this was a weak earnings quarter, driven by a combination of factors affecting both the sector and BP specifically,” said Chief Executive Bob Dudley in a statement.

Analysts said they were taken aback by the scale of BP’s write-downs.

The company took $1.50 billion in charges in its upstream division, due in part to its decision earlier this month to suspend the Liberty oil project offshore Alaska, which would have cost significantly more than expected.

BP also wrote-down the value of its shale gas assets, which have been hurt by very low U.S. natural gas prices. The second-quarter earning of BP’s peers, Royal Dutch Shell PLC (RDSB.LN) and Exxon Mobil Corp. (XOM), also suffered because of low U.S. gas prices.

BP gave little detail on the $2.68 billion of charges it took in its U.S. refining business.

Excluding these one-off charges, analysts said BP’s underlying earnings were still disappointing. Bernstein Research pulled no punches, describing BP’s second-quarter as, “a shocker, continuing the weak trend across the peer group.”

BP’s clean replacement cost profit, a keenly-watched figure which doesn’t include exceptional items like the asset write-downs, was $3.69 billion, down 35% from $5.71 billion the previous year. This was far below average expectations of $4.49 billion in a Dow Jones Newswires poll of 11 analysts.

It was also the lowest clean earnings reported by BP since the second quarter of 2009, when Brent crude averaged just $59.13 a barrel amid a severe global downturn, according to BP data.

Mr. Dudley said a heavy maintenance schedule in several of BP’s production heartlands exacerbated the impact of lower crude prices.

BP is still dealing with the fallout from its 2010 Gulf of Mexico oil spill, which was caused by an explosion on a drilling rig that killed 11 people. The company’s overhaul of its safety standards brought forward major repair and improvement work on many of its offshore installations worldwide, increasing costs and reducing production, including in high-margin areas like the North Sea, Angola and the Gulf of Mexico.

A $38 billion asset-sale program, to help cover the cost of the oil spill, has further reduced the firm’s oil and gas production.

Total oil and gas production was 2.275 million barrels of oil equivalent a day, a decline of 7.4%. BP’s extended maintenance program in the Gulf of Mexico alone resulted in the loss of around 85,000 barrels a day, the company said.

On top of this, proceeds from BP’s Russian joint venture, TNK-BP (TNBP.RS), were also lower than usual due to the combined negative effect of local export duties and the falling price of Russian crude benchmark Urals, Mr. Dudley said.

BP shares opened lower as investors tried to digest the flurry of bad news. At 0731 GMT, BP shares were down 14 pence, or 3.1%, at 430 pence.

Total revenue for the quarter was down to $94.89 billion, from $103.95 billion in the same period in 2011. Diluted earnings per share were a loss of 7.29 cents, compared with a gain of 29.90 cents the previous year.

Dow Jones Newswires