Concern over turmoil at BP's Russian venture, which accounts for one-fourth of its production, dominated the company's announcement of a 28 percent surge in second-quarter profits Tuesday. That key Russian joint venture, TNK-BP, is in the middle of a bitter shareholder dispute that analysts are watching closely. The venture, split between BP and AAR, a group of Russian billionaires, is Russia's third-largest oil producer. BP's partners want to cut investment to distribute more money for shareholders, but the London-based oil giant says that would cut output.
TNK-BP CEO Robert Dudley left the country last week after Russian prosecutors called him in for questioning, a request that was dropped after his departure.
Tony Hayward, BP's CEO, acknowledged Tuesday that doubt has been cast about TNK-BP's performance, but he said the venture has replaced reserves by nearly 140 percent since BP got involved in 2003. He also said TNK-BP distributed $18 billion to shareholders from 2003 through last year.
He said the dispute is about control, future governance and direction of the venture. "Other shareholders want to tear up the agreement they willingly signed in 2003," Hayward said. "We are not prepared to do that and will vigorously defend our rights using all legal means at our disposal. We will not be intimidated by strong-arm tactics."
Simmons & Co. International said in a note to investors Tuesday that while the outcome of the feud is uncertain, "it is worth noting that TNK-BP accounted for 16 percent of BP's adjusted earnings and 24 percent of its worldwide production" in the second quarter.
In the quarter, record oil prices that rose to $140 a barrel from $100.99 pumped second-quarter profits to $9.5 billion, or $2.18 per share, up from $7.4 billion, or $2.03 per share, in the second quarter of 2007. Production remained flat, while refining margins at half their year-ago levels limited the bounty from commodity prices.
Exxon Mobil, Royal Dutch Shell and Marathon Oil are slated to release results Thursday and Chevron on Friday. Hayward, former head of exploration and production for BP, who finished his first year as CEO in May, has repeatedly pledged to improve performance amid setbacks dating back to the 2005 explosion at its Texas City refinery and delays in getting key Gulf of Mexico platforms up and running. The company said Tuesday that the Texas City plant is on its way back to running at full tilt after more than $1 billion in upgrades and repairs since September 2005, and the platforms are preparing to ramp up to full production of a combined 450,000 barrels of oil per day.
"We are operating, it seems to me, in interesting times," Hayward said. "The world's economy is weakening, and the global political situation is delicate. The oil price continues to be high and volatile. Against this background, BP is making steady progress."
During the quarter, BP's overall production reached 3.83 million barrels of oil equivalent per day — nearly matching the year-ago period's production. The company said that excluding impacts of production-sharing contracts with other countries, overall production rose 6 percent. Under such contracts, companies are paid for their investments in barrels of crude. The higher the price, the fewer barrels they receive.
Andy Inglis, BP's head of exploration and production, told analysts that Thunder Horse in the Gulf of Mexico is producing more than 40,000 barrels a day from a single well. The platform, with capacity of 250,000 barrels a day, is on track to be fully commissioned with more wells operating by the end of this year, he said.
BP's refining and marketing segment earned less while processing more crude because of low refining margins. The segment earned $539 million, down from $2.74 billion when margins were high in the second quarter of last year. BP processed 2.24 million barrels a day in the quarter, up from 2.12 million barrels in the year-ago period, but the average margin was $8.19, down from $16.66 a year ago.
A refining margin is the difference between what companies pay for crude and the selling price of gasoline and other products made with it.
The margin environment's effects on integrated companies depends on the level of their exposure to refining, but pure refiners illustrate the issue. San Antonio-based Valero Energy's results, also released Tuesday, showed net income down 67 percent to $734 million, or $1.37 a share, from $2.25 billion, or $3.89 a share in the second quarter of 2007. Revenue was $36.6 billion, up from $24.2 billion a year ago.
Valero said benchmark Gulf Coast gasoline margins decreased about $22 per barrel, or 77 percent, from $28.95 per barrel in the second quarter of 2007 to $6.60 per barrel in the second quarter of 2008. John Parry, an analyst with John S. Herold, noted that U.S. refiners like Valero have a tougher time weathering the low-margin environment because the U.S. market relies more on gasoline at a time when demand is waning. But refineries in Europe, where diesel is dominant, are faring better because diesel demand remains strong, he said.
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