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Wednesday, April 27, 2011

BP Profit, Output Still Weighted Down by GOM Effects

Wednesday, April 27, 2011
Dow Jones Newswires
by Alexis Flynn

BP Wednesday posted a 5% fall in adjusted profit for the first quarter, as the damage wrought by the Deepwater Horizon disaster last year continued to weigh down its earnings and petroleum production outlook despite high oil prices.

The oil giant's results narrowly missed expectations for "clean replacement cost of supplies," which strips out gains or losses from inventories and other non-operating items. Profits under this keenly-watched benchmark totaled $5.37 billion for the quarter, compared with $5.65 billion for the first quarter of 2010. Analysts had expected $5.71 billion.

On the positive side, BP's latest charge of $400 million in Gulf of Mexico cleanup costs was more modest than some analysts feared. But BP said year-on-year oil and gas output dropped 11% in the first quarter, and signaled continued weakness in the second quarter, partly the result of increased maintenance procedures instituted after the 2010 U.S. drilling disaster.

While BP shares "look attractive," the "risk remains high for now" due to the uncertain status of BP's efforts in Russia, said Evolution Securities analyst Richard Griffith.

Analysts and investors will be looking for guidance on the company's ongoing Russian travails when Chief Financial Officer Byron Grote discusses the first-quarter results this afternoon at 1300 GMT.

BP's $16 billion share-swap and exploration deal with Russian state-owned giant Rosneft was blocked by an arbitration court last month following objections from BP's partners in its TNK-BP joint venture, and the U.K. firm could be forced to pay substantial compensation for it to go ahead. TNK-BP is also scheduled to report earnings Wednesday.

BP said it booked an additional $400 million charge related to the Gulf of Mexico spill, citing higher cleanup costs. But analyst Jason Kenney of ING said investors were relieved the latest charge was not higher.

Total oil and gas production was 3.58 million barrels a day, a decline of 11% on the year. This drop was partly the result of asset sales to pay for the Gulf of Mexico cleanup and production effects from due to the ongoing drilling shutdown in the U.S. Gulf. But BP said its output was also weighed down by higher maintenance in the North Sea and Angola, and by an interruption in the Trans-Alaska oil pipeline.BP said its second-quarter oil and gas output would also reflect these impacts.

"The main impact by far on production is the Gulf Of Mexico moratorium," a BP spokesman said. "There's also higher turnaround activity that we've been doing as we go through the increased spending on safety, particularly in the North Sea."

In the year since the disaster, BP has re-emerged as a fundamentally different company: it is smaller than before, having already shorn some $22 billion of assets; and with a different strategic focus, looking to fresh opportunities abroad to underpin its future growth.

However, a key part of this new strategy already appears to be floundering, with the challenge to the Russian deal.

BP didn't receive a dividend from TNK-BP for the period, the first time it hasn't received a payout from its Russian joint venture since the first quarter of 2009.

A BP spokesman said the decision to withhold the dividend was made by TNK-BP's board. However its partners in the joint venture, the Alpha-Access Renova group, in April threatened to withhold dividend payments for the year. BP is currently engaged in a dispute with AAR over its proposed alliance with Rosneft.

Net profit for the quarter was up 17% at $7.12 billion, compared with $6.08 billion a year ago.

Adjusted profit from BP's downstream business improved substantially year on year, nearly trebling to $2.07 billion, although the company cautioned that this was due to a favorable refining environment and a good performance by its trading division, and was unlikely to be repeated in the second quarter.

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