BP held back by Gulf oil-spill costs as rivals emerge from slump

[LONDON] Big Oil's profits are surging again, but shareholders in BP Plc have to wait a little longer for liftoff.

BP's deep cost cuts helped it almost triple profit last quarter, yet investors aren't seeing comparable growth in cash flow as the Gulf of Mexico oil spill continues to gobble up funds. That's hampering competition with rivals such as Total SA as they emerge from the oil slump, according to Banco Santander SA.

"BP is in effect six to 12 months behind companies like Total in benefiting directly from its focus on delivering growth," said Jason Kenney, an analyst at Santander in Edinburgh. "This is because of its additional cash commitments associated with US Gulf of Mexico and also paying down debt."

Total and BP are among the major oil producers beating first-quarter profit estimates after crude prices rallied and cost cuts kicked in.

But while BP raised adjusted income to US$1.51 billion, net debt climbed to the highest in at least a decade as spill-related payments sapped funds. The company will need oil at as much as US$55 this year to cover spending and dividends without borrowing.

Cash flow from operations, including payments for the 2010 Deepwater Horizon accident, was the lowest in a year in the first quarter, according to data compiled by Bloomberg. BP will cough up as much as US$5.5 billion this year in spill liabilities and about US$2 billion in 2018.

By contrast, Total is already investing for growth with plans to develop shale in Argentina and expand in Brazil. Exxon Mobil Corp and Chevron Corp. are also out of the doldrums, with analysts forecasting profit blowouts in the second quarter as cost cuts bear fruit. While BP has pledged a return to growth too, it'll need to contain net debt that's swelled to US$38.6 billion.

"Cash flow remains impaired in the first half of this year due to final Macondo outflows," said Sanford C Bernstein & Co analyst Oswald Clint, referring to the Gulf of Mexico disaster.

The accident killed 11 people and spilled thousands of barrels of oil, resulting in penalties that forced BP to sell about a third of its assets. The London-based company agreed in 2015 to settle all federal and state claims, giving investors visibility on the payments it needs to make over the next two decades.

"It's now much simpler to see what is going out," Santander's Kenney said. GEARING EXPANDS

BP's operating cash flow was US$4.4 billion in the first quarter, or US$2.1 billion following oil-spill payments. The company expects the penalties to ease over the remainder of the year and asset sales to increase, while project startups will also boost cash flow, chief financial officer Brian Gilvary said Tuesday. BP bought assets in Abu Dhabi and Africa at the end of last year, pushing its gearing, or net debt to capital, to 28 per cent.

"While gearing is high, I think the better results today are the start of a turning point," said Rohan Murphy, an analyst at Allianz Global Investors, which owns about 0.6 per cent of BP. "The payments are a handicap but BP is actually trying to accelerate some of the claims, which is a good strategy."

BLOOMBERG