Higher Earnings for BP in 1Q

Given the still weakened refining environment, we will monitor BP's efforts to curb costs and gain operational improvements

Catharina Milostan 27 April, 2010 | 4:56PM
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BP reported another period of earnings gains, with first-quarter replacement cost profit of $5.6 billion, up from $2.4 billion a year ago and $3.4 billion in the fourth quarter. Higher oil prices plus 3% lower unit production costs helped to boost upstream pretax and interest earnings to $8.3 billion from $4.3 billion a year ago. This was more than enough to offset lower refining and marketing earnings of $729 million versus $1.1 billion a year ago. Major projects under way should help BP keep its 2010 production target of slightly below 2009 levels, and we expect unit production cost gains to continue. We'll look for updates during the analyst call on ongoing projects in the US deep water and Rumaila field in Iraq and on environmental recovery efforts at BP's well site after the sinking of Transocean's drilling rig, Deepwater Horizon. Given the still weakened refining environment, we will monitor BP's efforts to curb costs and gain operational improvements.

On the upstream side, BP kept oil and gas production flat with year-ago levels at 4,010 thousand barrels of oil equivalent per day (mboe/d). Startups at its 33.3%-owned Great White field in the ultra-deep-water Gulf of Mexico and Noel project in Canada helped to offset natural field declines. Turnaround activity is planned for the second quarter in higher-margin areas including the North Sea and Gulf of Mexico including Thunder Horse, which may affect costs, margins, and production volume. We'll look for updates on planned drilling activity on longer-term projects in Rumaila and at properties to be acquired from Devon Energy in Brazil, Azerbaijan, and the deep-water Gulf of Mexico. BP lowered adjusted unit production costs 3% from year-ago levels and plans to continue its efforts to gain cost efficiencies this year.

On the downstream side, a still weakened refining environment may challenge BP for the rest of this year. Refining margins were lower than year-ago levels, while marketing margins were compressed by rising crude prices. BP intends to sell it marketing businesses in Namibia, Malawi, Zambia, and Botswana and focus on fuel marketing in South Africa and Mozambique. The firm has been some improvement in refining margins in the early part of the second quarter, but expects further improvement to be limited.

Catharina Milostan is an equity analyst with Morningstar.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BP PLC491.30 GBX0.41Rating

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Catharina Milostan  Catharina Milostan is a stock analyst with Morningstar.

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