BP ups spill cost estimate by $8 billion as profits dive

BP lifted its estimate of the likely cost of its Gulf of Mexico oil spill to $40 billion on Tuesday, denting profits, but its underlying performance beat all expectations on higher refining margins and a lower tax rate.

BP, the world's biggest non-government controlled oil company by production last year, said delays in capping its blown-out well prompted the increased charge for ending the leak, cleaning up the damage and compensating those affected.

The charge, up by $7.7 billion, pushed third-quarter replacement cost profit, which strips out unrealized gains or losses related to changes in the value of fuel inventories, down 63 percent to $1.8 billion.

Stripping out one-offs, including the oil spill costs, the underlying results rose 18 percent, compared to the same period in 2009, to $5.53 billion, well ahead of an average forecast $4.60 billion from a Reuters poll of seven analysts.

Underlying net result was boosted by a drop in BP's effective tax rate to 25 percent from 29 percent in the same period last year and analyst forecasts of around 30 percent.

The better-than-expected results, and comments that the oil giant plans to consider reinstating its dividend in 2011 -- something it had only hinted at previously -- lifted BP shares.

These rose 1.9 percent to 432 pence at 0956 GMT, against a 0.6 percent rise in the STOXX Europe 600 Oil and Gas index.

"I think with regards to BP, a lot of the uncertainty is out of the way, and it is slowly but surely getting back to business," Manoj Ladwa, senior trader at ETX Capital, said.

However, some analysts said the result was not a harbinger of better things as the tax rate would likely revert toward normal levels and BP itself said it would be hard to repeat the strong profits from the refining unit.

"The underlying beat is therefore of low quality," Oswald Clint, oil analyst at Bernstein said in a research note.

Underlying Profits Lag Peers

Most rivals benefited more from the 12 percent rise in crude prices in the quarter, compared to a year earlier, the 29 percent hike in U.S. natural gas prices and the doubling in British gas prices.

Royal Dutch Shell Plc reported an 88 percent rise in underlying third-quarter net profit and Exxon Mobil, the largest western oil major by market value, reported a 55 percent rise in net income.

Higher output in the quarter also helped lift BP's peers but the London-based oil company said its production fell 4 percent, compared to July to September 2009, to 3.76 million barrels of oil equivalent per day (boepd), due partly to dislocation related to the oil spill.

Analysts had expected BP to register an extra charge related to the oil spill in the third quarter, after delays in capping the well for good, but most had predicted a figure of around $2-3 billion.

The final cost of the oil spill could be far larger, or smaller, than the $40 billion charge BP has taken.

Anadarko Petroleum and Japan's Mitsui own 35 percent of the blown out well and they are contractually obliged to share the costs. However, they are claiming that this obligation is void because BP was grossly negligent.

Accounting rules require BP to ignore any recoverable payments that are not certain so it is possible that the partners do, in the end, pay up to 35 percent of the total cost.

However, if gross negligence is proven, then BP will face the entire $40 billion bill alone, and will face additional federal fines. Analysts at JP Morgan said if gross negligence is found, the final cost to BP could be $69 billion.

BP shares are down 34 percent since before the spill, representing a loss in market capitalization of over $60 billion.

BP said it would consider whether to reinstate its dividend payments -- canceled in the wake of the oil spill after a political outcry in the United States -- in early 2011.

Gordon Gray at Collins Stewart said he expected the dividend to be reinstated for the fourth quarter, at half the previous level, or 7 cents/share.

Emphasizing the optimistic tone in the results statement, BP said that the strength of its cash flows would allow it to raise its 2011 capital expenditure budget above the $18 billion it previously indicated.

[Source: By Tom Bergin, Reuters, London, 02Nov10]

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