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UPDATE - BP's downstream business cushions the blow of soft oil prices

Published: 21:44 28 Apr 2015 AEST

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As expected, the oil price collapse took its toll on integrated oil giant BP's (LON:BP.) profits, which fell sharply in the first quarter.

Underlying replacement cost profit for the quarter was US$2.58 billion compared with US$3.2 billion for the same period in 2014 and US$2.2 billion for the fourth quarter of 2014.  The market consensus forecast was US1.28bn, notes Liberum Capital, which was a bit closer with its own forecast of US$1.59bn.

Replacement cost operating profit at US$2,526mln was 20% above market expectations of US£2,095mln, Liberum noted.

The shares nudged higher, rising 1.6% to 484.5p, as analysts had been braced for an even worse outcome.

The upstream - oil producing - side of the business saw underlying pre-tax replacement cost profit collapse to US$0.6bn from US$4.4bn the year before, in line with expectations.

The Downstream - refining - segment of the business picked up some of the slack, with profits rising to US$2.2bn from US1.0bn a year earlier, well ahead of expectations of a figure around US$1.5bn.

"We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices. Our results today reflect both this weaker environment and the actions we are taking in response," said Bob Dudley, BP group chief executive. 

The asset disposal programme, which has been in full swing since the Macondo oil well tragedy in the Gulf of Mexico, is to continue while the company has reset its level of capital spending to reflect the new oil price environment.

Organic capital expenditure in the first quarter was US$4.4 billion and the group expects US$20 billion of total organic capital expenditure for 2015. 

The group, which recently returned to paying dividends, announced a quarterly dividend of 10 cents.

The shares rose to 485.85p at one point from 476.9p overnight, before ebbing to around 480p as UK blue-chips fell back, indicating general approval of the first quarter showing.

“Most analysts were expecting a fairly steep decline in net profits, so investors should note that these numbers are much better than expected. These results are believed to have been helped by increased production in oil and gas, efficiency gains, disposal of assets, lower exploration write-offs and improved conditions in the refining industry,” noted Helai Miah, an investment analyst at the private investor-focused dealing service The Share Centre.

“The diverse nature of BP has helped mitigate the losses of lower oil prices; however, to get a clearer picture of the impact of lower energy prices, investors need to look at the performance of the upstream business alone. 

“The energy giant’s upstream business reported replacement cost profit of US$0.6bn versus $4.4bn in the same period last year, despite the production increases. Furthermore, operating cash flow, which strips out the gains from asset disposals and lower write-downs, fell from US$8.2bn to US$1.9bn,” the analyst said.

The Share Centre rates BP shares as a 'buy' for those with an appetite for medium-sized risk, and observes that the management has committed to a stable dividend payment.


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