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By Alexis Flynn
BP PLC (BP) Tuesday posted a drop in first-quarter profits as the energy giant's asset sales after its U.S. oil spill contributed to a drop in production, preventing it from cashing in on bumper crude oil prices to the same extent as some rivals.
BP's results underscored the impact that the Deepwater Horizon disaster continues to have on the company more than two years after a rig leased by the firm exploded in the Gulf of Mexico, killing 11 and setting off the worst offshore oil spill in U.S. history. While BP's financial health is now sufficiently robust to withstand the multibillion-dollar costs stemming from the 2010 explosion and oil spill, production has yet to return to previous levels.
The company said its clean replacement cost profit, a keenly watched figure that strips out gains or losses from inventories and other non-operating items, dropped 12.8% for the period to $4.80 billion, compared with $5.50 billion for the first quarter of 2011. The adjusted figure is broadly comparable with net income under U.S. accounting rules.
This was below expectations of $5.10 billion in a Dow Jones Newswires poll of 10 analysts.
The London-based energy giant said net profit for the three months ended March 31 was $5.92 billion, compared with $7.25 billion for the first quarter of 2011.
While BP's profits were underpinned by high oil and gas prices, weaker production than in the corresponding period last year prevented it from benefiting in the manner of peer Royal Dutch Shell PLC (RDSB.LN), which last week posted a near 16% rise in first-quarter adjusted earnings.
Overall output declined 3% from a year ago, largely due to the continued shutdown of its 43,000-barrel-a-day Foinaven field in the U.K. North Sea and the continued impact of a wide-ranging asset sale program. Production at Foinaven was halted in January after a small leak was discovered in an underwater pipeline.
Total production was 3.471 million barrels of oil equivalent per day, compared with 3.578 million per day a year ago. Analysts had expected production to fall to 3.457 million barrels of oil equivalent per day.
By contrast, first-quarter production in 2010 -- the last period unaffected by the Gulf of Mexico disaster -- was 4.010 million barrels, some 13.4% more than current output.
Pretax profits at BP's refining and marketing business fell sharply from a year ago, dropping 58.8% to $856 million, as the higher cost of crude squeezed fuel product margins and slack consumer demand hurt the U.K. firm's retail business. This was still a significant improvement, however, on the $564 million pretax profit BP's downstream division reported in the previous quarter.
Total revenue for the quarter was up at $96.70 billion from $88.44 billion in the same period in 2011.
Diluted earnings per share were 30.74 cents, compared with 38.10 cents in the same period of the previous year.
BP shares opened Tuesday lower and at 0758 GMT, they were down 2.7% at 4335 pence. The stock has remained almost a third lower than it was before the Gulf of Mexico oil spill as investors continue to price in the risk of massive U.S. government fines.
Some analysts were phlegmatic about the company missing expectations, which they attributed to a quarterly "consolidation adjustment," based on a snapshot value of inventories at the end of quarter.
The accounting adjustment, totaling $541 million, reflects profits--made by BP's exploration and production unit selling oil at market-related prices to its refining business--not yet being realized as actual profits by BP as a whole, a BP spokesman said.
RBC Capital's Peter Hutton cited lagging production as a more pressing concern, while Jason Gammel of Macquarie Equities Research said this should be seen in the context of BP's massive asset sales undertaken in the wake of the Gulf spill.
"It's a part of an overall process [of divestiture and cost recovery]," said Gammel, adding that maintenance downtime has also had an impact.
-By Alexis Flynn, Dow Jones Newswires; +44 (0)20 7842 9317; [email protected]