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BP profit beats estimates even as oil-spill burden lifts debt

Adjusted net income for the first quarter is US$2.59 billion, the highest since 2014 and beating analysts' estimates of US$2.12 billion

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BP will return part of its higher earnings to shareholders by buying back shares issued in lieu of dividends during the downturn.

London

BP plc capped a shaky Big Oil earnings season on a more upbeat note, as investors reacted positively to the highest profit in years even as the continuing burden of oil-spill payments pushed debt higher.

The results show how investors in the London-based company are feeling the effects of two life-altering events. BP is still paying its way through the more than US$65 billion of penalties following the fatal Deepwater Horizon catastrophe in 2010. Yet they are also seeing some benefits from rising crude prices after a three-year industry downturn.

BP's chief financial officer Brian Gilvary said that factors that reduced the company's first-quarter cash flow - increases in working capital and payments related to the oil spill from the Macondo well in the Gulf of Mexico - would fade later in the year.

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"We've reached the peak now for quarterly payments in terms of Macondo," he said in a Bloomberg television interview on Tuesday. The company's debt will "come down as the year progresses, quarter on quarter, especially given where prices are today". Shares rose 1.2 per cent to 544.5 pence at 8.19 am in London.

BP's cash flow from operations in the first quarter, excluding payments related to spill, was US$5.4 billion. The company paid out US$1.6 billion on a pretax basis related to Deepwater Horizon, including a final US$1.2 billion payment to the US Department of Justice. Payments are expected to be just over US$3 billion in 2018, weighted to the first half of the year. The company's gearing, the ratio of net debt to equity, was 28 per cent, an increase from 27 per cent in the fourth quarter of 2017, BP said.

The spill payment in the first quarter was "US$500 million more than I expected", although that probably means that the burden will be lower later this year, said Redburn analyst Rob West. "Cash flow was good but messy, with less cash tax paid than expected."

Though BP has worked through nearly all of the 390,000 legal claims stemming from the 2010 explosion, the bill for its remaining claims unexpectedly jumped late last year. BP was forced to take a surprise US$1.7 billion charge to net income in the fourth quarter because the cases that did remain were among the largest and most complex.

Adjusted net income for the first quarter was US$2.59 billion, the highest since 2014 and beating analysts' estimates of US$2.12 billion.

"We have delivered another strong set of results" with rising output from major new projects, chief executive officer Bob Dudley said in a statement. "We're determined to keep delivering our operational targets and maintaining capital discipline while growing cash flow and returns."

Investors are looking closely at cash flow as an indication of Big Oil's ability to pass on the rewards of higher prices through share buybacks. Royal Dutch Shell plc generated less cash than analysts forecast in the first quarter, and its shares were hammered after chief financial officer Jessica Uhl said that the company was not yet ready to commence a US$25 billion stock repurchase programme.

BP has chosen to return part of the higher earnings from the windfall to shareholders by buying back shares issued in lieu of dividends during the downturn, spending US$120 million buying 18 million shares in the first quarter. At the same time, Mr Dudley has also pledged to keep a tight rein on spending and costs. BLOOMBERG