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BP reports underlying replacement cost profit of US$720 million for 2Q16

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Hydrocarbon Engineering,

BP has reported that profit for the second quarter of 2016 was US$720 million on an underlying replacement cost basis, compared with US$532 million for the previous quarter and US$1.3 billion for the second quarter of 2015.

Underlying operating cash flow for the quarter – before pre-tax Gulf of Mexico payments – was US$5.5 billion. This strong underlying cash flow resulted from continuing reliable operation of assets.

Progress also continued in resetting BP’s capital and cost base. BP’s cash costs over the past four quarters were around US$5.6 billion lower than in 2014 and BP continues to expect these costs for 2017 to be US$7 billion lower than in 2014. Organic capital expenditure for the first half of 2016 was US$7.9 billion; full year 2016 capital expenditure is now expected to be below US$17 billion.

BP today announced an unchanged dividend for the quarter of 10 cents per ordinary share (US$0.6 per ADS), expected to be paid in September.

Earlier in July BP announced that it had made significant progress in resolving outstanding claims from the Deepwater Horizon accident and oil spill, including claims associated with the Plaintiffs’ Steering Committee settlement and by individuals and businesses that opted out of and/or were excluded from that settlement. The progress made in resolving the opt-out and excluded claims was confirmed by a court order of 14 July. As a result, BP said it can now reliably estimate all remaining material liabilities in connection with the incident.

BP has taken a net post-tax non-operating charge in the quarter of US$2.8 billion. This includes a pre-tax non-operating charge of US$5.2 billion associated with the Deepwater Horizon liabilities and other positive tax credits. Including fair value accounting effects and inventory gains, this resulted in a reported loss for the quarter of US$1.4 billion.

Bob Dudley, BP Group Chief Executive said:

“We are very pleased to have finally drawn a line under the material liabilities for Deepwater Horizon. We will always be mindful of what we have learned from that tragic accident. BP today is a stronger, more focused and more disciplined company. We continue to actively develop a strong, balanced portfolio and we are managing the business for value over volume. Our relentless group-wide focus on capital and cost discipline is helping BP to become much more efficient while maintaining the investment needed for future growth.

“As we look forward we expect the external environment to remain challenging, but we have a strong pipeline of new projects which will add 500 000 boe/d of new production capacity by the end of next year. Beyond this lie further opportunities, including a number which we expect to deliver through innovative structures such as the recently announced Aker BP venture.

“We are delivering significant improvements to the business that will stick at any oil price. We are now well down the path of transforming our business to compete, whatever the future holds. We now see a much stronger outlook for BP and are focused on growth, both for this decade and beyond.”

Compared with a year earlier, the underlying second quarter result was impacted by lower oil and gas prices and significantly lower refining margins, but this was partly offset by the benefit of lower cash costs throughout the group as well as lower exploration write-offs. The Brent oil marker price averaged US$46 a barrel in the second quarter, up from US$34 in the first quarter but still significantly lower than US$62 a year earlier. While improved from the previous quarter, refining margins were the weakest for a second quarter since 2010.

In the first half of the year, BP received US$1.9 billion from divestments, including the partial sale of its interest in Castrol India.

At the end of the second quarter BP’s gearing level was 24.7%, within the target range of 20 - 30%.

Brian Gilvary, BP’s Chief Financial Officer, said: “We continue to reset our capital and cost base and are moving steadily towards our aim of rebalancing organic sources and uses of cash by 2017 in a US$50 - 55/bbl oil price range. This underpins our confidence in sustaining our dividend going forward.”

Segment results

BP’s Downstream segment reported an underlying pre-tax replacement cost profit of US$1.5 billion compared with US$1.8 billion in the previous quarter and US$1.9 billion in 2Q15. Compared with a year earlier the benefits of lower costs and a stronger fuels marketing performance were more than offset by the impact of significantly weaker refining margins. Underlying performance improvements in the Downstream have enabled the delivery of pre-tax earnings US$2.4 billion higher over the past four quarters than in a similar refining environment in 2014.

BP’s Upstream segment reported an underlying pre-tax replacement cost profit of US$29 million compared to a loss of US$747 million in the first quarter and a profit of US$494 million in 2Q15. Compared with a year earlier, the result reflected the impact of lower prices for both oil and gas, partly offset by the benefits from lower costs.

BP estimates its share of Rosneft’s underlying net income to be US$246 million for the quarter, compared with US$66 million in the first quarter and US$510 million a year ago. BP expects to receive an annual dividend payment from Rosneft of its share of 35% of Rosneft’s 2015 IFRS net income, around US$335 million after tax.

Strategic developments

In a presentation to the financial community in June, BP set out its Upstream strategy including its expectations for growth to the end of this decade and into the next. BP expects planned new Upstream projects to add 800 000 boe/d of production by 2020. Of these, projects with 500 000 boe/d of new production capacity are expected to be in place by the end of next year – these projects are on average already 70% complete and ahead of both schedule and budget.

In the second quarter, BP and Det norske oljeselskap announced they intended to merge BP Norge’s and Det norske’s businesses to form a new independent Norwegian oil company, Aker BP, in which BP will hold a 30% interest, Aker 40% and other shareholders 30%. BP and Rosneft also finalised the formation, subject to regulatory approval, of a joint venture to conduct onshore exploration in a vast area of Siberia.

BP has sanctioned the development of two new major upstream projects: the Tangguh LNG expansion project in Indonesia, adding a third LNG production train and new platforms, wells and other infrastructure to the existing facilities; and the Atoll Phase One gas project offshore Egypt. The new water injection project on the Thunder Horse field in the US Gulf of Mexico – which will increase production from one of the field’s main reservoirs – began operation in May.

Deepwater Horizon

Including this quarter’s US$5.2 billion pre-tax charge, the total cumulative pre-tax charge for the Deepwater Horizon incident is US$61.6 billion. This now includes BP’s estimation of all material liabilities associated with the incident; any liabilities not covered by this charge are not expected to be material to BP.

Adapted from press release by Rosalie Starling

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