BP and Total reveal smaller than expected fall in earnings

Two of the world's leading energy companies coped with plunging oil prices in the first quarter of this year by generating increased profit from refining and trading, suggesting large groups are better placed than smaller rivals to get through the slump.

BP and Total on Tuesday both reported sharp slides in first-quarter profit, hit by the tumble in crude prices that has battered revenue across the oil industry.

But the headline earnings falls at both groups were less than analysts had been expecting, partly because BP and Total benefited from improved refining margins - or the profit made in their downstream operations from processing crude into more valuable products, such as petrol and chemicals.

The large energy groups' refineries in effect acted as hedges against the sharp fall in Brent crude prices since last summer - something that smaller explorers and producers lack.

BP also enjoyed a robust performance from its oil trading unit, one of the largest in the industry.

Patrick Pouyanne, Total chief executive, said the French group was "demonstrating its resilience and profiting from its integrated model". The group was benefiting, too, from an extensive cost-cutting programme.

Kim Fustier, analyst at Edison Investment Research, said he expected other big energy groups such as ExxonMobil and Royal Dutch Shell, reporting over the coming days, to demonstrate the benefits of integration with similarly strong downstream results.

For the three months to March 31, BP reported underlying replacement cost profit - analysts' preferred measure - of $2.6bn, down 20 per cent compared with the same time last year.

Highlighting the impact of falling oil prices, BP's exploration and production division recorded $600m of profit in the first quarter of this year, down from $4.4bn one year ago.

But the company's downstream division - which houses refining, marketing and trading - generated profit of $2.2bn, up from $1bn one year ago.

"Their downstream presence clearly arrested and limited their overall profits decline to less than half the roughly 50 per cent year-on-year oil price drop," said Irene Himona, analyst at Societe Generale.

Some of the earnings growth at BP's downstream operations was due to its traders seizing on opportunities to store barrels of crude cheaply, and lock in a profit by selling them forward in the futures market. They took advantage of a structure known as the "contango", when prices for delivery later are higher than in the oversupplied spot market.

BP used more than $1.25bn in the first three months of this year to buy and store fuel. It expects to unwind those stocks through the year.

BP employs more than 4,000 people in its supply and trading unit. Its strong performance comes as many of the world's biggest commodity companies have said trading conditions are some of the best they have seen since 2009.

BP's US business made an upstream loss of $550m in the first quarter, hit by the payment of cancellation fees for two big offshore drilling rigs in the Gulf of Mexico. The contribution to profit from the group's stake in Russia's state-owned Rosneft came to $183m in the first three months of this year, down from $271m one year ago.

Like Total, BP is engaged in cost-cutting, and Bob Dudley, chief executive, said: "We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices."

Total reported adjusted net income of $2.6bn in the three months to March 31, down 22 per cent compared with the same time last year, and hit not only by falling oil prices but also writedowns on the group's assets in Libya and Yemen because of deteriorating security conditions.

But Total said a tripling of net income at its refining and chemicals division helped it beat analysts' expectations.

For BP and Total, the headline falls in their profit were due in large part to a halving in the price of Brent crude, which averaged $54 a barrel over the first quarter versus $108 one year ago.

Prices have tumbled since last summer because of a glut in US shale supplies, weaker than expected global demand and Opec's decision in November not to cut oil output. Gas prices were some 40 per cent lower in the first quarter compared to one year ago.

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