BP highlights the suffering in the ‘big oil’ sector as profits drop

BP’s results, hit by tough conditions in US refining and partly offset by strong contributions from its stake in Russia’s Rosneft, highlighted the industry’s struggle to increase profits in the face of rising costs.

The world’s fourth-biggest publicly traded oil company yesterday reported underlying replacement cost profit of $2.8bn for the fourth quarter of 2013, 28 per cent lower than the same period a year ago, but ahead of a consensus forecast of $2.7bn.

Exxon Mobil Corp, the world’s largest publicly traded oil company by market value, reported lower-than-expected quarterly profit last week, while Chevron and BP’s European rival Shell both issued profit warnings in January.

Investec analysts said BP’s beat on the consensus for underlying replacement cost profit was partially a result of a lower tax charge during the quarter compared to last year.

Bernstein analyst Oswald Clint said on an operational basis, the company missed a consensus target by around 10 per cent and its performance would have looked bleaker without the strong performance from its stake in Rosneft.

BP is also dealing with the fallout from the Gulf of Mexico oil spill which killed 11 men and became the United States’ worst offshore environmental disaster. The company said the provision to cover the spill’s clean-up, fines, compensation and legal costs had now risen to $42.7bn from $42.5bn last year.

Having settled criminal proceedings, BP is two phases into a three-stage civil trial, and has an army of lawyers working to push remaining spill fines and penalties into the future.

The group has been shedding assets since the 2010 spill, and sold businesses worth $22bn in 2013 alone.

BP said the fall in its earnings was partly due to its shrinking asset base, but also hurt by difficult conditions in its refining business, which is comparatively much smaller after it sold two major refineries in the US last year.

In its refining or downstream business, BP posted underlying pre-tax replacement cost profit of $70m in the fourth quarter, compared with $1.4bn in the same period in 2012.

Costs associated with the start-up of the Whiting refinery, also in the US, and exploration write-offs were partially offset by higher earnings from Rosneft.

Rosneft, the state-controlled Russian company into which BP folded its Russian business last year in exchange for a 19.75 per cent stake, delivered $1.1bn of BP’s profits.

BP reconfirmed a capital expenditure target of between $24bn to $25bn for this year and guided that cash flow would be in line with an earlier announced plan.

“They’re reiterating most of their targets, cash flow and capital expenditure, that’s a positive,” Bernstein’s Clint said.

Oil company shareholders, worried about the impact of rising industry costs crimping cash flow and the returns they will receive if oil prices drop, want oil companies to control spending and return spare cash.

BP stole a march on rival Shell last October, by hiking its dividend, scaling back capital spending and promising to return the proceeds of asset sales to investors.