Gulf Spill Costs Hit BP's Net Profit

BP posted a two-third decline in third-quarter net profit as it took $7.66 billion of charges related to the Gulf spill.

By JAMES HERRON

LONDON—BP PLC said Tuesday that its third-quarter net profit plunged by about two-thirds as it took an additional $7.66 billion pretax charge for the Gulf of Mexico oil spill.

The results shows how the spill continues to drag BP down relative to its peers, many of whom greatly increased their profits for the quarter. Total charges for the spill now amount to $39.9 billion, BP said.

The additional charge stemmed from costs arising from a month-long delay in completing the costly relief well that finally sealed the blown-out Macondo well in September, BP said. BP took a pretax charge of $32.2 billion in the second quarter related to the spill.

The costs of the oil spill in the quarter were greater than anticipated, but BP's underlying performance was strong, reflecting higher oil prices and greater profitability in refining and marketing, said Panmure Gordon analyst Peter Hitchens.

BP struck a confident note for the year ahead. "These results demonstrate that BP is well on track for recovery," said Chief Executive Bob Dudley. "This strong operating performance shows the determination of everyone at BP to move the company forward and rebuild confidence."

"Given the strength of our underlying cash flows and the investment opportunities available to us, our 2011 capital expenditure is currently under review and is expected to exceed the $18 billion previously indicated," the company said.

The British energy giant said third-quarter net profit totaled $1.79 billion, down sharply from $5.34 billion a year earlier. It said its clean replacement cost profit, a closely watched figure that strips out charges related to the spill, as well as the effects of oil-price swings, rose 18% for the period to $5.53 billion, compared with $4.67 billion for the third quarter of 2009.

BP says it believes its partners in Macondo, Mitsui & Co. Ltd. and Anadarko Corp., are liable for $4.28 billion of its costs for the oil spill. Mitsui and Anadarko deny they have any liability for the spill, and have paid nothing, but BP has billed them and will charge them interest on the unpaid sum, said Chief Financial Officer Byron Grote.

A report by a U.S. presidential commission last week that questioned the integrity of the Macondo cement job performed by Macondo contractor Halliburton Co., increases the chance that BP could reclaim some of the costs incurred, according to analysts at Bernstein Research.

Mr. Grote said the improvement in BP's financial position is encouraging with respect to its quarterly dividend, which was suspended in June and will be reviewed in February.

The decision as to whether to resume the dividend will be based purely on financial, not political, considerations, Mr. Dudley said. BP suspended the dividend amid immense pressure from the Obama administration and Democratic legislators this summer.

Mr. Dudley said he hoped politicians and the American people will come to a greater appreciation of the scale and effectiveness of BP's response to the spill, but declined to say whether an expected shift in power to the Republicans in Tuesday's midterm elections would improve BP's position.

BP's net profit was above expectations of $4.60 billion in a Dow Jones Newswires poll of 12 analysts, but its gains lagged major rivals. For example, Royal Dutch Shell PLC's profit for the quarter were up 88% from a year earlier.

A big part of BP's relatively weaker underlying performance was a 4% decline in total oil and gas production to 3.763 million barrels a day, which was due to maintenance shutdowns and the effect of the Gulf of Mexico oil spill.

BP shares finished London trading at 431.65 pence ($6.92), up 7.65 pence, or 1.8%.

Write to James Herron at james.herron@dowjones.com