BP's first-quarter results smashed analysts' expectations, with a 135 per cent rise in profits yesterday, thanks to rising oil prices and improved performance from the group's refineries.
The oil giant's replacement cost profit came in at $5.6bn (£3.7bn) in the first three months of 2010, more than double the $2.39bn of profits made in the same period of last year. Even without the effect of non-operating items and accounting effects the profits were up by 118 per cent, compared with City forecasts of a rise of around 85 per cent.
The unexpectedly strong results were overshadowed by last week's explosion on contractor Transocean's Deepwater Horizon rig, which killed 11 people and is responsible for a growing oil slick in the Gulf of Mexico. BP's shares plunged by a whopping 16.8 per cent yesterday, to close at 610p.
The key factor in the company's booming profits is the rising price of oil. All the oil majors were hit hard as oil tumbled from an all-time high of $147 per barrel in July 2008, down to only slightly more than $30 by the following Christmas.
Production restraints put in place by Opec – the cartel of the 12 biggest oil producing countries – were effective in putting a floor under the price in 2009, and so far this year, the price has climbed to more 18-month highs of over $86 on the strength of the improvement in the global economy.
Against such a background, BP's exploration and production (E&P) business saw a near-doubling in profits to $8.3bn, compared with the previous year. At 4 million barrels of oil equivalent per day, the group's production levels remained broadly flat. But the "average hydrocarbon realisation" level – or the actual price BP achieves for its products – was up by 7 per cent on the previous quarter and by 57 per cent on the same period of 2009.
Byron Grote, the company's chief financial officer, said: "The performance of the E&P business reflects the improved price environment and continued underlying operational momentum."
The picture from the group's refining and marketing division was more mixed. Profits of $790m were sharply up on the $19bn loss in the previous quarter. But they were still some 33 per cent lower than in the first quarter of last year as refining margins across the industry continue to be under pressure.
On the plus side, BP's refining capacity was running at 94 per cent availability over the three-month period, a considerable improvement on last year's 88 per cent. The division's costs were also down, largely due to cyclical procurement arrangements. But margins of $3.08 per barrel remain weak compared with early 2009, despite some improvements thanks to growing demand from recovering global economies.
Although global appetite for refined products is now rebounding, the oil industry still faces a longer-term structural issue. The majority of refinery capacity is in developed countries, where demand is set to continue to fall thanks to efficiency improvements. Meanwhile, growth is in developing economies not economically served by the same refineries.
BP's overall strategy is to boost oil and gas production by 2 per cent per year over the next five years, while simplifying its portfolio. In line with the plan, BP is selling its French retail business and withdrawing from five African countries. And last month the group signed a $7bn deal to buy assets from Devon Energy in the Gulf of Mexico, Canada, Azerbaijan and Brazil.
Mr Grote said: "The transaction with Devon gives us a material position in Brazil, deepens our incumbency in the Gulf of Mexico and Azerbaijan and enables us to accelerate the development of the Kirby field in Canada."