BP shares fell sharply Tuesday after Europe's second-biggest oil company booked nearly $5bn in accounting charges linked to its US shale gas fields and suspended its Liberty offshore oil project in Alaska.
BP posted a $1.4bn net loss for the three months ending in June, compared to $5.7bn last year, following the dwindling value of US shale gas assets and post-Gulf of Mexico oil spill payments. It also reported a decline in net-income in its oil production from joint Anglo-Russian joint venture TNK-BP.
BP also reported a $1.7bn of post-tax Gulf of Mexico expenditure, which pushed operating cash flow for the second quarter to $4.4bn, compared to $3.4bn in the previous quarter.
Overall, underlying replacement cost profit for the quarter, adjusted for non-operating items and fair value accounting effects for the second quarter 2012 showed significant decline.
BP's adjusted second quarter profit for the second quarter this year stood at $3.7bn, compared with $5.7 bn for the same period in 2011 and $4.8bn for the first quarter of 2012. The group blamed weaker oil and US gas prices together with reductions in output due to extensive planned maintenance, particularly affecting high-margin production from the Gulf of Mexico, and lower net income from TNK-BP.
"We recognise this was a weak earnings quarter, driven by a combination of factors affecting both the sector and BP specifically," said Bob Dudley, CEO at BP in a statement. "The effects of price movements have impacted our earnings in the quarter. Our extensive turnaround and maintenance programme, which will continue into the third quarter, is also affecting some aspects of our near term results. All of this will take time, but it is important investment that will enhance safety and reliability for the long term. As we deliver this major transformation, we are also committed to generating sustainable efficiencies in our operations."
BP shares fell more than 3 percent in the first hour of London trading to change hands at 430 pence each, the lowest level since June. The stock has lost around 6.5 percent so far this year.
Despite the disappointing results, BP announced a dividend for the quarter of 8 cents per ordinary share. It also added that declines in profit and higher costs were partially offsetted by a beneficial consolidation adjustment to unrealised profit in inventory.
"Rebuilding trust with our shareholders and other stakeholders is vitally important," said Dudley. "We are making progress against the critical strategic and operational targets we have set ourselves and are confident that this will deliver long-term, sustainable value."
TNK-BP Share Sale
BP's results showed that its share of net income from TNK-BP was $700m lower than the first quarter, driven by the impact of the rapid fall in oil prices amplified by the lag in Russian oil export duty, which is based on earlier higher oil prices.
At current Urals prices, net income in the third quarter is expected to show some positive reversal of the duty lag, said the group.
News of the decline may bode well for BP's prospects as the group gears up to sell its 50 percent stake in embattled Anglo-Russian joint venture TNK-BP.
BP's production of oil and gas, excluding TNK-BP, averaged 2.275 million barrels of oil equivalent per day (mmboed) in the second quarter, compared to 2.457 mmboed for the same period last year.
The group predicts that third quarter production will fall further, as the seasonal turnaround programme continues, before increasing in the fourth quarter.
In line with previous guidance, full year underlying production, adjusted for divestments, is expected to be broadly similar to 2011. BP's share of TNK-BP production in the second quarter was 1.016 mmboed, compared to 0.976mmboed for the second quarter of 2011.
IBTimes UK has reported extensively on BP's attempted sale of its 50 percent share in TNK-BP, since it announced the news on 1 June this year.
Only recently, IBTimes UK found that analysts believe that the sale of BP's stake could actually spur Western foreign investment into the sector, as well as provide a healthy backdrop for BP's future.
Rosneft, which is 75 percent owned by the Russian government and led by Russian President Vladimir Putin's closest confidant Igor Sechin, confirmed its interest in BP's stake this month.
"It doesn't matter what state-owned vehicle buys BP's stake in TNK-BP as it will provide around a $25bn cash payment to BP and will release them from being tied with AAR," says Malcolm Graham-Wood, analyst at VSA Capital Limited. "TNK-BP was a decent joint venture but the problem is with AAR, which has previously prevented BP selling, moving and of course entering other parts of Russia. It has got more and more difficult for BP to control AAR and get involved in more projects across Russia. The sale would result in a more positive outcome for BP than AAR because I have heard a number of times along the grapevine that they are not in good stead with the Putin regime, so I would be surprised if AAR will have an equal tie up with Rosneft - if they did buy BP's share."
On-going Gulf Of Mexico Challenge
Regardless who BP sells its stake in TNK-BP to, the sale could result in "north of $25bn" for the company that is looking to cut costs, shore up its balance sheet for litigation purposes and eventually deliver a higher return to shareholders.
BP has sold a number of assets to shore up cash, worth $23bn to date. It plans to raise $38bn in total before the end of 2013, after an explosion on BP's Horizon rig on the 20 April 2010, resulted in one of the largest oil spills and environmental disasters in history.
While the Gulf of Mexico oil spill resulted in an environmental disaster, it also caused colossal damage to the group's reputation and earnings. Even two years on, BP is still feeling the repercussions of the incident.
BP still faces significant legal liability for the disaster in the United States even after agreeing with the US Department of Justice to pay at least $7.8bn deal to victims of the explosion.
The UK group said in its results statement that it expects to increase operating cash flow by 50 per cent from 2011 levels in 2014, in a $100 a barrel oil price environment and is expected to be driven both by the completion of contributions into the Gulf of Mexico Trust Fund, by the end of 2012.
"Moving into 2013, we expect earnings momentum to build as we complete payments into the Trust Fund, as high-value production comes back on line, and as the impact of new projects ramps up," said Dudley.
By the end of the second quarter, BP had paid a total of $8.8bn in individual and business claims and government payments arising from the Deepwater Horizon incident.
The cash balances in the Trust and the Qualified Settlement Funds at June 30, amounted to $10.1bn, with $17.9bn contributed in and $7.8bn disbursed.
Exploration Projects in the Pipeline
BP is still looking to broaden its horizons by exploring new territory and setting up new production terminals, in tandem with selling assets.
It already expects the delivery of major projects, focused on 15 new higher-margin upstream projects scheduled to begin production by the end of 2014. Six are scheduled to start up in 2012, and two - Galapagos in the Gulf of Mexico and Clochas-Mavacola offshore Angola - are now on stream.
Six rigs are now operational on BP fields in the Gulf of Mexico, with a total of eight expected to be in place by year end.
The group says it continues to reshape and focus its portfolio and since the beginning of 2010 has now entered into agreements to sell assets with a value of $24bn. Total divestments since 2010 are targeted to reach $38 billion by the end of 2013.
In exploration, during the second quarter this year, BP acquired 43 leases in the Gulf of Mexico, which are awaiting regulatory approvals.
It also resumed operation of its long-term exploration contracts onshore and offshore in Libya.
Seismic activities are underway in Angola and Namibia and several exploration wells are currently drilling. A major seismic survey in BP's Ceduna Basin acreage offshore southern Australia, was also completed.