BP PLC returns to profit in 1st-Q but result well below year earlier

BP PLC, Europe's 2nd largest oil company, scaled back its spending target for this year to reflect lower oil prices after posting a 62% drop in 1st-Q net profit from 2008. But the company's shares remained steady Tuesday as the 1st-Q results exceeded expectations -- marking a return to profit after a fourth quarter loss -- and as the company made further headway in a cost-cutting drive. Net profit for the 3 months to the end of March was $2.56 billion, down from $7.09 billion in the same quarter a year ago, but up from the $3.2 B loss in the 4th-Q. Analysts had pegged 1st-Q profit at $2.2 billion. "While we have concerns over BP's longer-term volume growth prospects, we think it is likely to show one of the better growth rates this year," said Collins Stewart analyst Gordon Gray. BP shares were nearly flat at 483.5 pence ($7.06) on the London Exchange. Cost cuts and a rise in oil and gas output as new projects came onstream helped contain the decline in net income. BP reported a profit of $4.3 billion in its exploration & production division, down from $4.8 billion in the 4th-Q and 62% below the year-ago result. Pretax profit from refining & marketing was $1.4 billion vs a loss of $8.1B in the 4th-Q. Output in the exploration & production division was 2% higher than 2008. That reflected a ramp-up in production from major projects began in 2008, although the company warned that the actual rate of growth will depend on factors such as oil prices and their impact on OPEC quota restrictions. Lower oil prices prompted BP to reduce its capital expenditure target to less than $20B for the year from as much as $22B estimated in Oct. Replacement cost profit -- a key measure for oil companies -- was $2.4B in the 1st-Q, down from $2.6 billion in the 4th-Q & far below the year-earlier result of $6.2B. The replacement cost figure is viewed by analysts as the best measure of an oil company's underlying performance because it excludes changes in the value of crude inventories, measuring the amount it'll cost to replace assets at current prices. BP's moved to boost efficiency since the appointment of Tony Hayward as CEO in 2007. The company shed 3,000 staff in 2008 & expects to ax more than the 5,000 posts originally planned by the middle of this year. It said it reduced costs in the 1st-Q by over $1B in the quarter. "A challenge for all oil & gas companies is to reduce operating costs because although the oil price has fallen back to 2004 levels, industry costs doubled since 2004," said Charles Stanley analyst Tony Shephard. "BP looks to be ahead of the curve in terms of delivering cost savings." Given the action already taken & deflation entering the supply chain, Shephard expects BP's cost base to fall by around $2B this year. The company raised its quarterly dividend payment by 4% to $0.14 a share. For its British shareholders, that is a 40% gain because of the fall in the value of sterling. Peter Hitchens, analyst at Panmure Gordon said he remained cautious about BP shares. "Although the company pays an attractive yield of about 8.1%, we believe the current operating environment won't allow any growth in this dividend & there could well be some concerns over a weakening balance sheet," he said.