BP’s profits slump by 45%

Oct 24 2007 by Iain Laing, The Journal

OIL giant BP revealed a 45% fall in profits yesterday as production problems showed that they continue to blight the business.

The London firm’s third-quarter profits of £1.9bn came in below analysts’ expectations, after ongoing problems at its US refineries.

The City had been braced for the poor results after new chief executive Tony Hayward reportedly described BP’s operating performance as “dreadful“ last month.

BP has endured a difficult year after two critical reports into an explosion at its Texas City refinery in 2005, which killed 15 people, and the earlier-than-expected departure of long-serving chief executive Lord Browne.

Two weeks ago, Mr Hayward unveiled plans to shake up the operational performance of the company in a “fundamental shift” which will see the company strip out management layers.

In a break with his predecessor, Mr Hayward said BP’s performance had “materially lagged” its rivals for the last three years and criticised the complexity of the business.

Operational difficulties at its Whiting refinery – as well as higher maintenance and repair charges – saw profits from BP’s refining and marketing division slump from £736.5m to just £184m.

Despite the poor results, BP hopes to have both its Whiting and Texas City refineries running at full capacity in the first half of next year. The refining operation’s performance also suffered lower demand for heating oil in Europe due to milder weather, which hit sales slightly.

BP – the world’s third largest oil company – saw a 36% fall in profits at its exploration and production division compared with the same period last year. Lower gas production and higher maintenance costs added to the profits pressure while last year’s figures were also boosted by asset sales.

The company added that third-quarter production levels slipped 4%, after being hit by factors including damage to its Central Area Transmission System pipeline in the North Sea.

But the firm stuck by full-year production forecasts, saying levels would still be in line with the 3.8 million to 3.9 million barrels of oil equivalent a day guidance earlier this year.

It added that major exploration projects were progressing well and has embarked on commissioning the Atlantis field in the Gulf of Mexico. For the nine months of the year so far, BP’s profits are down 22% to £7bn.

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Analysis

Richard Hunter, head of UK equities at stockbroker Hargreaves Lansdown, reckons the firm could be over the worst. He said: “The difficulties in the production and refining areas have, as expected, materially affected profits for the quarter.

“This being said, the outlook for the remainder of the year looks promising. The recent oil price highs should underpin performance, along with the resumption of projects such as the Gulf of Mexico, and in the foreseeable future, the Texas refinery, which should return to full capacity.”

He added: “The challenges may not be over, but at least the rot seems to have been stopped.”

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The new man at the top

THE fall in profits is the latest disappointment in a turbulent year which has seen BP scandalised

The resignation of former chief executive Lord Browne came in May after he lied to a court to prevent newspaper reports of his relationship with Canadian lover Jeff Chevalier.

The ignominious end to the 12-year reign of the "Sun King" at the world’s third largest oil company left heir apparent Tony Hayward in the hot seat sooner than expected – but determined to strip out layers of fat from the company, reduce "unacceptably high" overheads and improve operational performance.

He outlined his priorities of "safety, people and performance" two weeks ago, but problems at BP’s refining and marketing operation continue to dent the group’s profits during a period when oil prices have reached record levels above US$90 a barrel.

After a five-month review, the new chief executive ascribes the company’s competitive shortfall to a combination of lower US refining capacity and production delays in the Gulf of Mexico, as well as BP’s higher cost base compared to rivals.

This year "operational issues" have led to unplanned maintenance stoppages and production problems at BP’s Whiting, Carson City, Texas City and Toledo refineries

The difficulties meant that BP lost refining opportunities – at a time of record margins for the industry – as well as forcing it into the market to buy petrol at a time when the price was rising.

But Mr Hayward will now hope to draw a line under previous woes.