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Bloomberg: BP Profit Falls on Lower Oil, Gas Prices, Production (Update3)

By Stephen Voss

April 24 (Bloomberg) — BP Plc, Europe’s second-largest oil company, said first-quarter profit fell 17 percent because of lower energy prices and falling production.

Net income declined to $4.66 billion, or 23.9 cents per share, from $5.62 billion, or 27.1 cents, a year earlier, London- based BP said today. By another profit measure, BP missed analysts’ estimates. Revenue fell 3 percent to $62 billion.

Most European oil companies are likely to report lower profit before growth resumes in the second quarter, Citigroup Inc. said. BP’s Tony Hayward will be tasked with restoring investor confidence, shaken by criticism of a fatal refinery explosion in 2005 and last year’s output decline, when he takes over as chief executive officer from John Browne on Aug. 1.

“I can’t see BP outperforming its peers with this relatively poor set of quarterly results,” Jason Kenney, an analyst at ING Wholesale Banking, said in a telephone interview today from Edinburgh. “They have now got the next 12 to 18 months to turn negative sentiment around,” said Kenney, who has a “hold” rating on the stock.

The company’s shares have rallied 13 percent over the past five weeks, recouping this year’s losses, after tumbling 8.3 percent in 2006. BP stock was little changed at 578 pence as of 10:34 a.m. in London. The company today announced a new offshore oil discovery, Miranda, its 13th in Angola’s Block 31.

Excluding Inventories

Excluding gains or losses from holding inventories or one- time items, profit fell 24 percent to $4 billion, versus an expected figure of $4.08 billion, according to the average of eight analysts surveyed by Bloomberg before the earnings were released.

Oil and gas production declined 3 percent from the year earlier quarter to 3.912 million barrels a day, BP said. It was the seventh consecutive quarter in which supply fell from a year ago.

Citigroup analyst James Neale, who has a “buy” recommendation on BP, said in a note today that the earnings were “below our forecast and consensus.” The bank last week said earnings at Europe’s nine biggest oil companies will fall 9 percent on average, with London-based BP among the worst. Merrill Lynch & Co. analyst Mark Iannotti downgraded his recommendation on the stock to “neutral” from “buy,” on April 19 to account for recent price gains and the lack of “game-change catalysts.”

Among other major oil companies, Houston-based ConocoPhillips reports earnings tomorrow, Irving, Texas-based Exxon Mobil Corp. on April 26, The Hague-based Royal Dutch Shell Plc on May 3 and France’s Total SA on May 4.

Whiting Refinery

Lower energy prices meant pretax profit at BP’s exploration and production division, its biggest business unit, fell 11 percent to $6.04 billion. U.K. natural gas prices averaged less than a third of what they did a year earlier, and North Sea Brent crude spot prices fell about 6.5 percent, according to BP’s own figures.

Profit dropped almost in half at the company’s refining and marketing division, to $838 million before tax. Higher refining margins were offset by “operational issues” at several refineries, including the Whiting, Indiana, refinery which BP said was still running at half capacity following an April 4 power loss.

Hayward, 49, currently BP’s exploration chief, is “a safe pair of hands” with proven capability negotiating deals in Angola and Russia, ING’s Kenney said.

Shareholder Revolt

The ING analyst said BP faced two options earlier this year, to either “open up the purse strings” to pay for more exploration, or accept that BP’s previous 4-percent-a-year output growth targets were “too ambitious.” BP chose the latter, and Hayward is likely to keep BP growing “slowly and solidly,” Kenney said.

BP’s production, hurt last year by the temporary halt of its Prudhoe Bay oil field in Alaska when oil leaked from corroded pipelines, is likely to rebound in coming months when a delayed platform in the Gulf of Mexico, Atlantis, starts up.

Almost a fifth of BP shareholders voted against directors’ pay and bonus packages at an annual general meeting earlier this month, to protest the disparity between executive pay and BP’s health and safety lapses. The investor revolt was led by the Local Authority Pension Fund Forum, an association of 39 U.K. public-sector pension funds that own 1.2 percent of BP’s shares.

The explosion at the Texas City, Texas, refinery in March 2005, which killed 15 workers, continues to draw attention as a Texas judge last week ordered BP to publicly release an internal study that blames specific managers at the plant. BP’s lawyers said on April 18 they would immediately appeal the ruling in a court of appeals, temporarily staying release of the report.

Stock Buybacks

BP is spending more on stock buybacks than its European peers as a means of propping up its share price and returning wealth to shareholders. The company buys its own shares every day, spending $2.5 billion last quarter and $15.5 billion last year.

On April 17, BP Chairman Peter Sutherland defended the policy against protests from some small shareholders who want to be paid more dividends instead, by arguing that it wasn’t possible to estimate how much further BP stock would have fallen last year without support from buybacks.

In contrast, rival Shell hasn’t spent any money on buybacks since Feb. 1, when Chief Financial Officer Peter Voser told reporters that he was “not a philosophical believer” in buybacks because they haven’t boosted Shell’s stock enough.

Buybacks need to be large to have an impact, ING’s Kenney said. “Shell never really gave it the full gusto.”

To contact the reporter on this story: Stephen Voss in London at [email protected]

Last Updated: April 24, 2007 05:51 EDT

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