BP's troubled waters

As problems continue to pile up, the oil giant's claim to have turned a corner is still seen as premature

Even Bob Dudley had to admit that BP's dramatic swing into the red was a disappointing show yesterday. And the BP chief executive got no argument from investors, who sent the FTSE 100 group's shares down by more than 4 per cent in their biggest one-day decline in nine months.

During a second quarter in which BP was apparently attacked from every angle, the oil giant recorded an astonishing change of fortune, reporting a far-worse-than-expected net loss of $1.4bn (£893m) for the period, down from a $5.7bn profit a year earlier.

Everything, it seems, was to blame. Mr Dudley pointed the finger of blame at everything but the kitchen sink yesterday after a multiple-whammy of woes descended upon the oil giant in the three months to July.

BP was hit by high production costs at the same time as oil and gas prices tumbled. This squeezed the company's bottom line twice over – once by reducing the profit margin on hydrocarbons produced in the second quarter and again by forcing the company to take $2.1bn of charges.

These related to BP's decision last month to suspend its Liberty project in the Arctic as cost estimates spiralled, and to a writedown in the value of its US shale gas assets as the growing popularity of "fracking" forced gas prices down to 10-year lows, while hiking up labour and equipment costs.

A further $2.7bn writedown relating to BP's out-of-favour US oil refining business compounded a gloomy picture in the country, albeit one where the company was buffeted by industry-wide problems. But even stripping out the impact of one-off charges, BP's profits came in 35 per cent lower at $3.69bn – well below consensus analyst estimates of $4.5bn.

"This is a pretty shocking set of results," said Iain Pyle, an analyst at Sanford C Bernstein.

"This is a very, very disappointing set of results; they missed across all fronts by a wide margin," concurred RBC Capital Markets analyst Peter Hutton.

"It was clearly a testing quarter," admitted Mr Dudley, blaming "a combination of factors affecting both the sector and BP specifically". Which brings us to BP specifically.

The hydrocarbon giant suffered a substantial, larger-than-expected decline in production after closing several key oil fields, such as Mad Dog and Atlantis, for maintenance in its crackdown on safety following the Gulf of Mexico oil spill in 2010. This helped push BP's US oil production down by a quarter.

Furthermore, the company increased by $847m its provision for compensation and other charges arising from the Gulf of Mexico oil spill, which resulted in 11 deaths and widespread environmental destruction. The company has now set aside a total of $38bn to satisfy the estimated bill.

The final of Mr Dudley's fingers of blame was pointed at Russia, where BP is seeking to sell its 50 per cent stake in its problematic joint venture with the AAR consortium.

TNK-BP contributed $700m less to BP's bottom line in the second quarter as the unit was punished by a lag in Russian oil export duty, which was based on earlier higher oil prices. Brent crude traded 7 per cent lower, on average, in the second quarter against the year before. Mr Dudley insisted yesterday that his claim last October that "BP had turned a corner" had not been premature, and that the company remained on course to meet its key target of delivering a 50 per cent increase in cash flow by 2014, compared with 2011.

He added that, by the end of the year, BP will have completed payments into the trust fund to compensate victims of the oil spill, production at Mad Dog and Atlantis will have resumed and new projects will have started up.

"I don't think the company is losing its way whatsoever," Mr Dudley said, adding that it "was heading in the right direction for the long term." Oil and gas prices also rebounded in July, he pointed out.

But he also admitted that BP would "continue to have a higher level of uncertainty" until two key issues were resolved. The first is the eventual bill for the fallout from the Gulf of Mexico oil spill. Mr Dudley reiterated that he is still open to a settlement with the government, having reached one earlier with the fishermen and other private claimants.

However, BP continues to insist it is not guilty of "gross negligence", and has based its $38bn estimate of its total payout on the court agreeing with its prognosis. If it does not, BP could incur at least $10bn of additional liabilities.

The second is the issue of Russia and the sale of its TNK-BP business – which out-of-pocket long-term investors hope will feed through into a hefty one-off dividend. However, Mr Dudley didn't give them any assurance on that front, saying "it's very possible that the sale may not materialise" and refusing to give any clues as to whether a disposal would even trigger a shareholder payout.

There is also the fact that, while a sale of TNK-BP would end years of acrimony with its joint venture partners, it has been a good earner, accounting for nearly a third of its oil production. While Mr Dudley pledged his continuing allegiance to what he called the "largest hydrocarbon country on the planet", he was unable to say how he would make up the shortfall left by the loss of the joint venture, except to say "stay tuned".

BP's shares yesterday fell by 19.4p to end the day at 425.05p, giving a clear sense that, whatever Mr Dudley might say, shareholders believe he called the "corner turn" too early.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
Tangerine Dream Edgar Froese
people
News
Rob Lowe
peopleRob Lowe hits out at Obama's snub of Benjamin Netanyahu
News
Davies (let) says: 'Everybody thought we were having an affair. It was never true!'
people'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Arts and Entertainment
Over their 20 years, the band has built a community of dedicated followers the world over
music
News
Staff assemble outside the old City Road offices in London
mediaThe stories, the writers and the changes over the last quarter of a century at Britain's youngest paper
Life and Style
The Oliver twins, Philip and Andrew, at work creating the 'Dizzy' arcade-adventure games in 1988
techDocumentary looks back at origins of the computer-games industry
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Krall says: 'My hero player-singer is Elton John I used to listen to him as a child, every single record
music
News
Friends for life … some professionals think loneliness is more worrying than obesity
scienceSocial contact is good for our sense of wellbeing - but it's a myth that loneliness kills, say researchers
Arts and Entertainment
The Wu-Tang Clan will sell only one copy of their album Once Upon A Time In Shaolin
musicWu-Tang Clan and The Sexual Objects offer fans a chance to own only copies of their latest albums
News
i100
Environment
Number so freshwater mussels in Cumbria have plummeted from up to three million in the 20th century to 500,000
environment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us