BP reports profit, but Gulf disaster a drag on output *updated*

LONDON — BP PLC reported today lower than expected earnings for the second quarter as it struggled to lift production in the wake of the Gulf of Mexico oil spill.

Although the actual costs of the spill diminished, the fallout from the disaster continued to weigh on output, down 11 percent from pre-spill levels. The company said the damage to its reputation could have a long-lasting impact on its prospects.

BP reported a net profit of $5.6 billion for the three months ending June 30, compared with a loss of $17.2 billion a year earlier.

Replacement cost profit, a closely watched industry benchmark, was $5.3 billion compared with a loss of $17 billion a year earlier. The second quarter result was lower than the average analyst forecast of about $6 billion.

Last year’s earnings were hit by a $32 billion charge for responding to the Gulf of Mexico crisis.

The lower-than-expected profit hit BP’s shares. They were trading 2.5 percent lower at $7.58 as trading opened on the London Stock Exchange.

“In our opinion the key factor for investor sentiment is the long-term actions to restore the lost shareholder value,” said Tony Shepard, analyst at Charles Stanley & Co. He said investors are waiting for an update on the company’s strategy following the collapse of its Arctic exploration deal with Russia’s Rosneft.

Richard Griffith, analyst at Evolution Securities, said BP’s recovery was on track and affirmed a “buy” rating on the shares.

BP said it has so far paid $6.8 billion for economic and environmental restoration in the Gulf of Mexico, including $5.1 billion from a $20 billion trust fund to settle individual claims.

In the second quarter, payments from the trust fund totaled $2.1 billion, including $873 million to individual and business claimants.

The company said the majority of the cleanup on the U.S. Gulf coast was completed in the first three months of the year, while “limited” work continued on marshes and barrier islands. No further work is planned on the seabed, BP said.

The company acknowledged that “the Gulf of Mexico oil spill has damaged BP’s reputation, which may have a long-term impact on the group’s ability to access new opportunities, both in the U.S. and elsewhere.”

In the short-term, the disaster has had a clear impact on BP’s production levels.

During the second quarter, its oil and gas production was 3.43 million barrels of oil equivalent a day, down 11 percent from a year earlier, BP said that primarily reflected “the ongoing impacts to Gulf of Mexico production as a result of the suspension of drilling, and the continuing divestment program.”

Full-year production is expected to remain close to that level, BP said.

Chief Executive Bob Dudley was upbeat about the company’s prospects, saying he expects future cash flows to grow faster than output.

“We expect the momentum of our recovery to build into 2012 and 2013 as new projects come on stream, particularly in higher-margin areas; as we complete current turnaround activity; as we return to work in the Gulf of Mexico; and as uncertainties reduce,” Dudley said.

Lamar McKay, head of BP America, told investors in a conference call this morning the company is making “significant material progress” in getting back to work in the Gulf of Mexico, where the company is the largest producer. To that end, BP said earlier this month it was enacting a series of voluntary safety standards on operations in the Gulf of Mexico that go beyond federal requirements.

But while other operators including Chevron Corp., Shell and Noble Energy have received new permits to drill in the Gulf following a post-spill ban on most of those activities, BP still has not. So far, it has only gotten an application for a permit to address a safety and environmental issue with one of its Gulf platforms.

McKay said the company is only now starting the process of applying for drilling permits, having used the time since the deadly Macondo well blowout in April 2010 to overhaul internal safety practices. However, BP officials could not say when they expect its production in the Gulf, now at roughly 250,000 barrels per day, to return to pre-disaster levels of about 400,000 barrels per day.

Dudley said he had been notifed that a final report from a joint Interior Department-Coast Guard panel investigating the Gulf catastrophe had been delayed from its July 27 due date, but he did not know when it would arrive. He said he expected the findings to echo other investigations that noted the accident was the result of “multiple causes and multiple parties,” rather than the fault of BP alone.

Separately, Dudley said that 2011 had been “an unusually good year” for gaining access to resources, with new tracts awarded in Australia, Indonesia, Azerbaijan, the United Kingdom, the South China Sea and Trinidad.

He said BP will double its oil and gas exploration spending over the next several years as it pursues opportunities in existing basins and emerging areas.

Meanwhile, the company will also continue a program to sell $30 billion in assets by year end to help pay for spill liabilities. Roughly $25 billion of that has been completed so far, and company officials said a previously announced plan to sell half of BP’s U.S. refining assets is not part of the target. Those proceeds will be separate.

Dudley said BP will look at “many, many options” for unlocking more value from the firm’s global portfolio of assets, without responding directly to speculation that the company could consider spinning off its refining business, as smaller rival ConocoPhillips recently announced plans to do.

Houston Chronicle reporter Brett Clanton contributed to this post.