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The Wall Street Journal: BP’s Net Income Rises 1.5% On Sale of Refinery, Pipeline

Wall Street Journal image: Tony Hayward BP CEO

By GUY CHAZAN
July 25, 2007; Page A2

BP PLC’s new chief executive, on the heels of a disappointing quarter, promised to turn around a company dogged by stagnant output, refinery outages and the rising costs that are increasingly pressuring the world’s biggest oil companies.

BP — the world’s third-largest nonstate-controlled oil company by market capitalization behind Exxon Mobil Corp. and Royal Dutch Shell PLC — posted a net profit of $7.38 billion, up 1.5% from a year earlier, the latest in a string of big numbers from oil companies as petroleum prices linger near highs.

But industry observers pointed to the boost BP’s bottom line received from gains on asset disposals such as a U.K. refinery. Without those and other factors, the company’s underlying profit fell from a year earlier, they said.

BP’s results reflect the woes afflicting major oil companies in an increasingly difficult operating environment. Overall, most analysts expect oil-industry earnings to rise modestly this quarter, mostly from strong profit margins from refining.

But getting the crude oil out of the ground remains a challenge. Production volumes are slipping and costs rising as demand for much-needed manpower and equipment surges, and companies undertake more capital-intensive projects.
 
Investment bank UBS estimates that the cost to produce every barrel of oil rose 16% in the second quarter from a year earlier, as labor, services and material shortages contributed to industrywide inflation. Indeed, the world’s largest oil-field-service company by market capitalization, Schlumberger Ltd., reported record earnings late last week and improved margins across its product lines.

Industry analysts will be watching closely how cost pressures affect the bottom line at Exxon Mobil and Shell, which announce their second-quarter earnings tomorrow.

Inflation is hitting the majors as they struggle to cope with growing competition from national oil companies and the rising resource nationalism of oil-producing countries eager to claw back control of their natural resources.

BP is itself a casualty: After months of regulatory pressure, its Russian joint venture was forced to sell its stake in a huge natural-gas field in Siberia last month to OAO Gazprom, the Russian state-run gas company, at a knock-down price.

But many of BP’s other problems are unique to the company. It has suffered a string of mishaps, such as an explosion at its Texas City refinery that killed 15 workers and an oil spill in Alaska. Outages at some of its U.S. refineries meant it was unable to take advantage of record-high refining margins. And some of its biggest upstream projects — like the hurricane-damaged Thunder Horse production platform in the Gulf of Mexico — have been plagued by delays. That has hit output, which was 3.8 million barrels of oil equivalent a day in the second quarter — down 5% from a year earlier.

Tony Hayward, who took the helm at BP last May when his predecessor, John Browne, stepped down over revelations about his private life, said the company’s operational performance was “not good enough” and that he was determined to fix it.
 
He said BP would get all its U.S. refineries back up to capacity by 2008 and pledged to streamline the company’s organizational structure. He said BP would hire more engineers, as delays on projects like Thunder Horse were partly because of an excessive reliance on outside contractors. Another initiative includes deploying 100 planners from head office to work as engineers in the field. “It’s about getting people out closer to the operations,” he said.

In London yesterday, BP’s shares fell 1.9% to 590 pence ($12.14).

Mr. Hayward said he expected further pressure on earnings and free cash flow from cost inflation, which was running at 10% annually, as well as from higher depreciation charges. Depreciation costs are rising because of the larger investments major oil companies need to deploy to find oil in a high-cost environment.

“It’s a specter that’s going to haunt the industry for the next five years — depreciation playing catch-up with the inflated capital you’re spending today,” said Neil McMahon, an oil analyst at Sanford Bernstein.

But some analysts said that while BP had reached a low point in operational terms, it stood to benefit greatly as its long-delayed upstream projects gradually come online and its refineries return to full capacity. The company also stressed it had had continuing exploration success in Angola, Egypt and the Gulf of Mexico and had recently concluded a $900 million natural-gas deal in Libya, which was its biggest exploration commitment.

“BP does have some significant revenue streams that will come on from this point forward,” said Jason Kenney, an analyst at ING bank. “It can only get stronger from here.”

The News: BP reported disappointing second-quarter net income of $7.38 billion, including gains.

Industry Woes: Production volumes are slipping and costs are rising for all oil companies.

Company Issues: BP has had a string of mishaps, but new CEO Tony Hayward has pledged to get U.S. refineries back up to capacity and to streamline the organization.

–Russell Gold contributed to this article.

Write to Guy Chazan at [email protected]

Wall Street Journal BP Chart

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