BP Swings Back to Profit but 2010 Oil Spill Is Still Taking a Toll -- 2nd Update

BP PLC is once again raking in billions of dollars in cash.

The British oil giant, which on Tuesday was the last of the world's biggest Western oil companies to report quarterly earnings, said it can now break even when oil is at $47 a barrel, cushioning it against an extended period of low prices.

Though BP's equivalent to second-quarter net profit was, by oil industry standards, a relatively modest $553 million, that compared with a loss of $2.2 billion a year earlier. And that was despite oil prices stuck at $50 a barrel or less for much of the year and further costs associated with the Deepwater Horizon oil spill in 2010.

Low oil prices, driven by a glut in supply, have forced the entire industry to pivot, cutting costs and seeking new avenues for growth. Like peers Exxon Mobil Corp. and Royal Dutch Shell PLC, BP has moved to ramp up production through relatively low-cost projects that make money at depressed crude prices.

BP also cut $7 billion in costs last year, the effects of which are beginning to bear fruit, Chief Financial Officer Brian Gilvary said in an interview.

He said the company is targeting a break-even oil price of $35 to $40 by next year. Just a few months ago, BP disappointed investors by saying it needed $60 a barrel to cover its costs.

BP's share price was 2.6% higher in around noon in London, as the company's results beat analyst expectations.

Chief Executive Bob Dudley said oil prices still presented a "tough environment." But he sounded a rare note of optimism, calling $50 a barrel "a pretty good fairway for us going forward."

Brent crude, the international benchmark, has been rising in recent weeks and was trading at $52.81 a barrel on Tuesday morning in London--up about 13% in the past three weeks.

The oil industry has been gloomy about prices in recent days. Royal Dutch Shell PLC Chief Executive Ben van Beurden said the company was prepared for oil prices to remain "lower forever."

That was a riff on a phrase Mr. Dudley coined about prices back in 2015, when he said they would be "lower for longer." On Tuesday, Mr. Gilvary said BP sees prices remaining "lower for longer but not forever."

"They will firm this quarter," Mr. Gilvary said of oil prices. "They will stay underpinned by strong demand...They will start to drop off into the fourth quarter."

The company can now cover most of its expenses and dividends with cash instead of debt, he said--a key metric of success in today's oil industry.

Mr. Gilvary said the only thing holding back BP's profit was more than $4 billion in payments related to the 2010 blowout on the Deepwater Horizon oil rig in the Gulf of Mexico. The explosion killed 11 workers, spilled millions of barrels of oil into the Gulf and forced BP into a long period of retrenchment, with costs estimated at over $60 billion.

Mr. Gilvary said the payments had a reached a "high point for the year" and "will taper down from here" to about $1 billion a year. The company reached a $20 billion settlement in 2015 with federal and state authorities that must be paid out over almost two decades.

The Deepwater Horizon incident has been a drag on BP at the worst time, weighing on the company during a historic downturn in oil prices. BP's profit and cash flow have consistently lagged behind its peers. Its net debt rose to over $39 billion in the second quarter, compared with about $30 billion in the same period last year, because of such payments, BP said.

Mr. Gilvary said BP was girding for oil prices of $45 to $55 a barrel this year and next year, a recovery from last year's low of $27 but well below the consistently high levels of $100 seen from 2011 to 2014.

The company increased its oil-and-gas production by almost 10% compared with a year earlier.

BP's exploration-and-production unit was buoyed by a raft of discoveries and new projects in Senegal, Egypt, the U.K. North Sea, Trinidad and Tobago, and India. The company is turning to new projects and acquisitions to try to generate growth again, hoping to boost production by a third in the next three years.

"BP has underperformed its peers recently and we would expect some of that underperformance to reverse in the near term," wrote Biraj Borkhataria, an oil-company analyst for RBC Capital Markets, in a note Tuesday.

Write to Michael Amon at michael.amon@wsj.com

(END) Dow Jones Newswires

August 01, 2017 07:46 ET (11:46 GMT)