- Q2 underlying profit up 34% YoY, up 13% on Q1
- Rosneft contributes $1bn but sanctions concern
- Q3 production to be less than expected
BP has announced second-quarter profits one-third higher than the same period last year, but that further sanctions imposed on Russia "could have a material adverse impact", notably affecting its part ownership of Rosneft.
Underlying replacement-cost-profit for the quarter of $3.6bn was higher than expectations of $3.4bn and 13% higher than the $3.2bn generated in the first quarter of 2014 as new projects began to ramp up.
But with the conflict around Ukraine likely to lead to tougher international sanctions on Russia, the company warned that these would hurt its business in Russia and its 19.75% stake in Russia's state-owned oil firm Rosneft.
Rosneft added $1bn to profit in the quarter, up nearly fivefold on the same period last year and not far from double the first quarter contribution. But Rosneft has also this week been ordered to pay $50bn in damages to shareholders of the bankrupt oil firm Yukos.
The FTSE 100 company held its quarterly dividend at 9.75 cents per share from the preceding quarter, still representing an 8.3% year-on-year rise and with the board to review the level of the dividend for the third quarter.
Share buybacks also contributed to shareholder value, with a massive $8bn buyback completed in mid-July thanks to the sale of a stake in its TNK-BP Russian arm. It has put in place agreements to divest a further $3.4bn as part of its plan to dispose of $10bn of non-core assets by the end of 2015.
Cash flow of $7.9m was greatly boosted by rising oil and gas production from new and recently-started higher-margin upstream projects and increased processing of heavy crude oil
by the upgraded Whiting refinery.
Group Chief Executive Bob Dudley heralded another successful quarter: "We are continuing to ramp up the major new projects that drive delivery of cash flow and are also now seeing benefits from our focus on operating with greater reliability and efficiency.
"This operational momentum keeps us well on track to meet our 2014 targets and underpins our longer-term commitment to grow distributions to our shareholders."
BP's underlying upstream profit rose 8.6% year-on-year to $4.7bn thanks to higher production in the Gulf of Mexico and other key regions, but was partly offset by the impact of divestments and higher non-cash costs.
Downstream profit fell by 39% to $0.73bn from the $1bn last year due to a significantly weaker refining environment and a weaker contribution from supply and trading only partially offset by benefits from Whiting improvements.
Looking ahead, the company said it expected third-quarter 2014 reported production to be lower than the second quarter, primarily reflecting a major turnaround and seasonal maintenance activities in Alaska and the Gulf of Mexico.
"We expect the seasonal reduction to be slightly larger than we experienced in the same quarters of 2013 due to phasing of these activities," it warned.
Analysts were mostly impressed. RBC said the results were "moderately positive" and emphasised the positives in US production volumes beating expectations and US operating income the highest since the first quarter of 2012.
Investec said the update was "straightforward", but noted that BP's cash drive left it "impressively on track" to achieve its full year cash flow target. "On likely unchanged forecasts, BP is towards the less expensive end of what we believe to be an overvalued sector," analyst Neill Morton wrote.
On the down side, Hargreaves Lansdown's Richard Hunter bemoaned lower production for the quarter, the "not totally clear" situation on the remaining liabilities from the Macondo spill in the Gulf of Mexico and the less positive outlook for the third quarter.
"The real sting in the tail," he said, "could come from BP's 20% stake in Rosneft, depending on the severity of any further sanctions imposed on Russia."
Jasper Lawler, of CMC, said BP's exposure makes it much more susceptible to political headwinds than its peers, which only have minority interests in Russia through oil prices
and strategic partnerships with Russian oil companies.
Current US sanctions do not, as yet, bar US companies from transacting with their Russian counterparts nor do they freeze assets.
"The likely result would be a higher cost of funding for the likes of Rosneft, which will eat into earnings from any future investment without directly preventing any kind of strategic partnership," he said.
Having risen more than 1% in early trading, shares
in BP were down 1.7% to 488.6p at 15:33 on Tuesday.