BP PLC on Tuesday reported 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 463.45 pence ($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. It estimates the total cost of the spill, including the trust fund, at $40.7 billion.
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.
Oil and natural gas production in the Gulf of Mexico has slumped 43 percent to some 250,000 barrels of oil equivalent per day.
"It's probably going to go down even more before it goes up," Argus Research analyst Phil Weiss said. "Those wells decline, and it doesn't look like they're ready to start production somewhere else" anytime soon.
Chief Executive Bob Dudley was nevertheless 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.
He added 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.
Dudley told investors in a conference call that the company has rebounded since a year ago, when "our own survival was in question."
BP continues to scour the globe for more petroleum sources, and it plans to get back to drilling in the Gulf of Mexico very soon, the CEO said.
Earlier this month, U.S. regulators granted BP its first permit for plugging and abandoning a well in its Atlantis field in the Gulf. The company expects to begin exploring again in the region very soon.
"It's not right for us to lay out a timeline because it is regulators who approve the permits," Dudley said. "But we have lots of people gearing up ready to go."
BP estimates the Gulf of Mexico spill will cost the company $40.7 billion, including the $20 billion trust fund to handle damage claims. That estimate does not include potential legal settlements and major government fines stemming from the spill. BP said it has started an arbitration process with Anadarko Petroleum Corp., which is a part-owner in the blown-out Macondo well. BP claims Anadarko should pay $5.5 billion for its share of the spill costs.
AP Energy Writer Chris Kahn in New York contributed to this report.