The FINANCIAL -- BP PLC on Tuesday swung to a loss in the second quarter, as earnings were hit by lower oil prices and a multibillion-dollar charge relating to the deal it reached earlier this month to settle U.S. federal and state claims over the 2010 Deepwater Horizon disaster.
The U.K. oil giant said its replacement cost loss—a number analogous to the net income that U.S. oil companies report—was $6.27 billion, compared with a profit of $3.18 billion a year earlier. The sharp decline includes a $ 9.8 billion pretax charge that BP recorded as part of an $18.7 billion agreement with the U.S. government and five states to settle legal claims relating to its Deepwater Horizon fatal oil spill in the Gulf of Mexico. The net charge recorded by the company for nonoperating items amounted to $7.5 billion, according to Nasdaq.
It was the second time in the past six months that BP posted a quarterly loss, reflecting how deeply the oil-price slide has affected its operations and the mounting cost the Deepwater Horizon spill continues to exact. The company has slashed spending this year, delaying projects with reserves of over 3.5 billion barrels of oil and gas—more than any other big independent energy company, according to Wood Mackenzie.
The last five years have taken their toll on the company, which sold off more than $40 billion in assets to raise cash for oil-spill cleanup and legal costs. So far the incident has cost the oil giant nearly $55 billion in pretax charges and it remains embroiled in lawsuits relating to the spill, but the deal struck earlier this month settles the largest claims against the oil giant and gives BP far more certainty over the ultimate size of its liabilities.
While the settlement will give the company more room to maneuver, the weak oil price will keep the pressure on. Crude prices have already reversed much of the gains made in the second quarter with Brent crude sinking to a four-month low this week.
BP's upstream arm, which focuses on oil production, reported pretax earnings of $0.2 billion in the second quarter, down from $4 billion in the same period a year earlier. Lower prices had a particular impact on BP's earnings from its stake in state-controlled Russian oil company OAO Rosneft. Its underlying net income from the company fell by nearly 50% in the second quarter of 2015 to $510 million from $1 billion a year earlier. The company's upstream results were also affected by a $600 million charge relating to its exploration activities in Libya, where the company has been unable to operate because of political upheaval amid an ongoing armed conflict.
"The external environment remains challenging, but BP moved quickly in response and we continue to do so," said Chief Executive Bob Dudley. "I am confident that positioning BP for a period of weaker prices is the right course to take, and will serve the company well for the future."
The company has already announced plans to cut spending in response to lower prices and organic capital expenditure for the whole year is now expected to be below $20 billion. Meanwhile, the company continues to maintain its focus on simplification and efficiency programs intended to help control costs. Its total cash costs to date this year are estimated to be around $1.7 billion lower than in the same period of 2014. Its gearing, the ratio of debt to equity, also remains within the company's 10%-20% target band and net debt fell to $24.8 billion at the end of the second quarter, $293 million lower than at the end of the first three months of the year. The company maintained its dividend at 10 cents per ordinary share.
"We can see clear progress in our capital programme and from our work to reset and reduce cash costs. Our focus remains on rebalancing the company's sources and uses of cash in a lower price environment," said Chief Financial Officer Brian Gilvary.
Despite the tough environment created by low oil prices, BP did receive some support over the last quarter from its refining arm. Refineries have enjoyed months of extraordinarily high margins thanks to weak crude prices and rising demand. BP's downstream business, which includes refining and marketing, saw pretax earnings increase by nearly 75% in the second quarter to $1.6 billion compared with $933 million a year earlier.