How Much More Will BP Disappoint?

Payouts related to the Deepwater Horizon spill have cut BP (NYSE:BP) profits more than expected, with both assets and production going down in the first quarter. The company also announced it expected further drops in the second quarter, and now the larger worries are about its long-term plans for a turnaround.

BP shares, already down 8.9 percent this year, against a 1.8 percent average industry drop, fell another 3.6 percent on Tuesday morning on the back of the earnings report.

The company also announced the earnings of its Russian joint venture TNK-BP separately, adding to rumors that it may be close to selling off its 50 percent stake in the company after continued differences with its partners in the country.

Oil and gas production, excluding at TNK-BP, was down 6 percent at 2.45 million barrels of oil equivalent per day. Production in the Gulf of Mexico had already gone down last year, with the company only producing 260,000 barrels of oil equivalent per day, from around 400,000 boepd before the spill.

The spill was caused after an explosion in April 2012 that killed 11 workers. Oil leaked unabated for about three months. The company has been forced to sell assets to make up for the fines it has already paid to the government and those it is expecting further, with many lawsuits still active. The Department of Justice investigations could lead to criminal and civil charges as well as fines of more than $20 billion. BP is also discussing property and medical claims by more than 100,000 individuals and businesses.

Added safety measures after the spill have also raised costs for the company. Production is expected to fall another 50,000 boepd in the second quarter because the company is selling more Gulf oil fields.

Europe’s second-largest oil company by market value is causing analysts to worry about its ability to increase output and cut down costs at the same time. BP is also expected to struggle to raise its dividend to the level it was at before the spill, analysts at brokerage Bernstein said in a note.

“The real challenge is at what point the Department of Justice problems are going to be washed away,” James Bevan, chief investment officer at CCLA Investment Management told Bloomberg TV. “The shares aren’t going to rise materially until that news is out of the way.”

BP said replacement cost net profit fell to $4.93 billion in the first quarter, compared with $5.61 billion in the same period last year. Leaving out one-off items such as the profit on asset sales, the result was down 13 percent to $4.80 billion, below an average forecast of $5.10 billion.

The drop in profit compares with a 16 percent rise at competitor Royal Dutch Shell (NYSE:RDS) last week, a 1 percent drop at ConocoPhillips (NYSE:COP), and an 11 percent drop at Exxon Mobil (NYSE:XOM), the biggest oil company in the world. Brent crude prices averaged $118.60 per barrel last quarter, up from $105.43 in the same period a year before.