The Malaysian Insider

LONDON, April 28 - British oil major BP Plc said it was learning to live with oil at US$50 (RM180) per barrel by slashing costs, after the crude price collapse sent first-quarter profit plummeting and debt levels higher.

Europe's second-largest oil company by market value said its replacement cost (RC) net profit, which strips out gains or losses related to changes in value of fuel inventories, fell 62 per cent to US$2.39 billion in the first three months of the year.

"We need rapidly to bring our costs to a level that is compatible with a US$50 world," Chief Executive Tony Hayward said in an email to staff seen by Reuters.

However, profits fell less than analysts predicted, echoing the experience of U.S oil major ConocoPhillips and Italy's ENI last week and raising hopes the sector was adapting to the oil price slump.

"BP's Q1 results reflect a sharper-than-expected fall in unit costs coupled with a strong oil trading performance," Neill Morton, oil analyst at MF Global, said.

BP shares rose 1.4 per cent to 490 pence at 0944 GMT, bucking a 0.62 per cent drop in the DJ Stoxx European oil and gas sector index.

The cost of producing oil and gas fell 11 per cent in the quarter compared to the same period in 2008 and in aggregate, BP cut over US$1 billion from its cost base in the past year.

A spokesman said the continuation of trend will allow BP to shave its 2009 capital expenditure to under US$20 billion, compared with the US$20 billion to US$22 billion BP said in March it expected to spend.

A spokesman added that the cut in the capex forecast was in small part due to delays in some projects.

STRONG TRADING

BP, which has a reputation as one of the most aggressive traders of oil cargos and derivatives in the market, said first-quarter earnings were helped by a "very strong" performance in its energy trading operation.

The contango in oil markets, whereby future prices for crude are higher than today's prices, helped BP, and ConocoPhillips, play the markets successfully, Morton said.

The companies, and others such as Royal Dutch Shell Plc, which reports its first-quarter earnings tomorrow, have been buying oil today, simultaneously entering contracts to sell it in the future, locking in a profit, and in the meantime storing the crude offshore in tankers.

London-based BP said oil and gas production rose 2.6 per cent to 4.02 million barrels of oil equivalent per day (boepd), the first time the company topped the 4 million boepd level since the second quarter of 2006.

In recent years, most of the large international oil and gas companies have reported falling output and are expected to do the same this quarter.

BP's debt levels rose as it borrowed to fund its generous dividend. Gearing rose to 23 per cent compared with 19 per cent last year.

BP needs oil prices of US$60/bbl to generate enough cash to fund investment and pay its dividend, analysts said, and investors fear a prolonged oil price slump could force the company to cut its 14 cents/share per quarter payout.

"The sustainability of such a payout is still questionable," Jason Kenney, oil analyst at ING said.
However, analysts at Cazenove said the current dividend was "affordable" in 2009.

Excluding one-offs items, which amounted to a net charge of US$194 million, the RC result was US$2.58 billion, ahead of an average forecast of US$2.28 billion from a Reuters poll of seven analysts. - Reuters