Low Oil Prices Crush BP plc (ADR)(BP) Profits

short-oil-etfBob Ciura:  Oil and gas giant BP PLC (NYSE:BP) released second-quarter earnings on Tuesday. The results were about as ugly as investors should have expected, given the steep drop in commodity prices over the past year. However, BP managed to beat analyst expectations, and the stock rose more than 3% after the company released its quarterly report.

It appears BP stock is enjoying a relief rally. The company suffered greatly under the pressure of collapsing oil and gas prices, but it made a lot of progress last quarter.

Here is a rundown of BP’s quarter, and why the worst may finally be behind it.

Write-offs, Low Commodity Prices Weigh on BP Profits

BP posted a net loss of $6.3 billion last quarter. Of course, low commodity prices weighed down BP last quarter. Its average Brent crude oil price was $62 per barrel last quarter, down from $110 per barrel in the same quarter last year.

Because of this, BP’s upstream profits collapsed to $500 million, down from $4.7 billion year-over-year. This makes the stock rally look very confusing, but it’s likely investors are looking past this scary number because the loss includes many one-time charges that are not expected to recur.

For example, BP took a non-operating pretax charge of $9.8 billion relating to its previously announced settlement with the government over the 2010 Gulf of Mexico oil spill. Until recently, the company was still involved in the civil trial stemming from the oil spill. In order to finally resolve the situation once and for all,BP settled for $18.7 billion, to be spread over an 18-year period.

While the huge charge contributed largely to BP’s net loss last quarter, it’s nonetheless a good sign that it can finally put the trial behind it. Investors now have a great deal more certainty about how much BP will owe.

Separately, BP took a $270 million business restructuring charge, which was also non-operating. It also wrote down the value of its Libyan assets by $600 million, due to the continued social unrest there.

Operations Remain Sound

While the slew of write-offs are discouraging, investors should instead focus on BP’s core underlying operations. Despite all of its various challenges, the company still generated $6.3 billion of operating cash flow. This represents a relatively modest decline from $7.9 billion in the same quarter last year.

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