BP Earnings Soar, but Rig Explosion, Oil Spill Fears Drive Shares Down

Profits at British oil giant BP (BP) surged 135% in the first quarter of 2010, but the news did not stop investors from unloading its stock for a second straight day, responding to uncertainty over the costs it will incur to clean up the rapidly expanding oil slick from loss of Transocean's (RIG) Deepwater Horizon drilling rig, which BP was leasing. The rig sank into the Gulf of Mexico last week after an explosion set the structure ablaze, but the well continues to leak oil at a rate of about 1,000 barrels a day.

BP reported replacement cost profits of $5.59 billion for the first quarter of 2010, up from $2.38 billion in the first quarter of 2009. Revenue for the company surged 55% to $74.4 billion. Analysts say the company's results were helped by higher oil prices, which have more than doubled from about $40 a barrel this time last year to more than $85 this month. But even with those good numbers, by midday Tuesday, the stock was down $1.57 cents to $56. 34, off 2.71%. On April 23, BP stock closed at $59.88.

Shares of Transocean also continued to decline. Transocean stock dropped $3.40 to $84.60 down 3.8% in midday trading. On April 23, Transocean shares closed at $89.89.

Even with such great production to start the year, Morningstar equity analyst Catharina Milostan believes BP must continue to curb costs and make operational improvements to remain profitable through the end of 2010 due to the "weakened refining environment." Observers question how much higher oil prices can go before they begin having a negative effect on the global recovery, which would send prices lower, and BP's accident in the Gulf of Mexico points up the dangers and high cost of exploring for oil. Also, the high price of cleaning up an environmental disaster, plus the costs associated with rebuilding the company's reputation if such a disaster hits, would have long-term negative effects on the company's profits and revenues.

Analysts Like BP's Long Term Prospects

Still, BP has managed its growth well. Milostan points out that the company has a number of ongoing projects that could prove highly profitable for the company in the near-term. In a note to investors she wrote:

Zacks Equity Research also likes BP's long-term growth prospects. "Though the oil spill could hit the oil major temporarily, BP remains the largest producer in the Gulf of Mexico and has been successfully accessing substantial new resource opportunities. In the last month, the company purchased $7.0 billion assets from Devon Energy Inc. (DVN) which also includes assets in the U.S. deepwater GoM."

While the oil slick has expanded to nearly 800 square miles and the damaged well continues to spew 1,000 barrels of crude a day into the Gulf, the National Oceanic and Atmospheric Administration continues to classify the spill as "very thin" and consisting of 97% sheen. The hope is that the relative thinness of the film of oil will make it easier for spill response vessels to skim the oily mixture off the water and prevent any oil from reaching land.

"The safety of the people working offshore is our top priority and the improved weather has created better conditions for our response," said BP Group Chief Executive Tony Hayward in a statement. "This, combined with the light, thin oil we are dealing with has further increased our confidence that we can tackle this spill offshore."

Efforts to seal the damaged well continue. If a remotely operated robot can't seal the two leaks in the well that are more than 5,000 feet underwater, BP plans to drill a second well to help seal the first at an estimated cost of $100 million.