BP earnings plunge, cost cutting on target, but sees 'little evidence of growth'

BP (BP) is not only Europe's second-biggest company by market value after Royal Dutch Shell (RDS.A), it is also one of the five major oil companies in the world. So when BP reported earnings today, many looked at the results and the outlook as a way to get a glimpse into the other oil majors reporting in the next few days, including ExxonMobil (XOM) -- and as way to find out what the company expects of oil demand and, by proxy, the global economy.

Not surprisingly, since oil prices plunged from a record $147 a barrel last July to less than $33 in January, and then more than doubled to around $68 today, BP reported its second-quarter profits were down by more than half to $3.14 billion compared to last year's quarter. Still, profits were 14 percent higher than the the first quarter bottom and also ahead of analysts' expectations. (BP's average oil price in the quarter was $52.33 a barrel, $109.95 in the second quarter of 2008, and $41.26 in the first quarter.)

Specifically, underlying net profit were down 66 percent from last year at $2.94 billion, beating the $2.82 billion median estimate according to Bloomberg.

But what made this report probably more unique than what many analysts expect to see from other oil companies is the cost-cutting measures BP reported, which progressed far better than the company and analysts have expected. These measures were undertaken by CEO Tony Hayward, who is leading the turnaround in the oil giant, and the goal now upped. Still, despite Hayward's insistence the cost cutting success was due mostly to measures taken by the company as part of the restructuring, steps it started taking before other oil companies did, some believe much of the impact on cost came from favorable exchange rate and lower energy cost.

Hayward said in a statement: "We are in turbulent times, volatile and uncertain. But we continue to steer a steady course through choppy waters. Two years ago we set out to restore our ability to compete more effectively with our rivals in the sector. The momentum we established in that process remains very powerful."

BP also reported a four percent rise in oil and gas production. While positive on the one hand, it leaves questions regarding overproduction considering the current environment.

And as for the current environment, Hayward said the latest economic data suggested the global economy could stabilize this summer but that any recovery, whenever it comes, would likely be sluggish: "The overall picture is of energy demand now stabilizing following significant falls in the first half of the year. We see little evidence of any growth in demand and expect the recovery to be long and drawn out." Specifically, Hayward sees oil prices likely trading towards the lower end of a $60-$90 a barrel range, probably below what investors would like to hear.

One question is whether other oil companies can match BP's cost cutting that offset the lower oil prices and lower margins faced by the industry. BP had done a decent job with that this quarter, although challenges remain especially with low refinery margins.

The more important question is how oil and gas companies will fare in the near future as oil prices try to find an equilibrium to meet the new demand levels. Demand has dropped by 1.5 million barrel a day from last year's levels and it doesn't look like producers and industrial demand is set to increase any time soon.

With such a muted outlook on the industry, it's no wonder BP shares declined three percent in early trading.

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