BP & TOTAL PROFITS
Two of the world's leading energy companies weathered plunging oil prices in the first quarter of this year by making increased profits from refining and trading, suggesting large groups are better placed than smaller rivals to cope with the slump.
BP and Total on Tuesday reported sharp slides in first-quarter profit, hit by the tumble in crude prices that has battered revenue across the oil industry.
But the fall in headline earnings at both groups was 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 turning crude into more valuable products, such as petrol and chemicals.
The large energy groups' refineries effectively 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 Pouyanné, Total chief executive, said the French group was "demonstrating its resilience and profiting from its integrated model". The group was also benefiting from extensive cost-cutting .
Kim Fustier, an analyst at Edison Investment Research, said she expected other big energy groups such as ExxonMobil and Royal Dutch Shell, which are 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 earnings 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 a 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. It said the trading result alone was up to $350m better than average.
"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, an analyst at Société Générale.
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 these stocks through the year.
BP employs more than 4,000 people in its supply and trading unit. Many of the world's biggest commodity companies have said trading conditions are some of the best they have seen since 2009.
Like Total, BP is engaged in cost-cutting and another 800 staff left the group in the first quarter. 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. This marked a significant improvement in fortunes for the division, which for years has weighed on the company's earnings.
The group said that margins in refining and chemicals would continue to be strong in the second quarter.
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