BP profit plunges two-thirds

Settling US claims following the deadly explosion in the Gulf of Mexico five years ago caused shares in BP to rally earlier this month. The benefit, however, was brief, and they've since plunged 11% to a six-month low. Now, the oil major has swung deep in to the red in the second-quarter and underlying profit has missed expectations, largely due to weak oil prices and one-off charges.

BP lost almost $6.3 billion in the second quarter versus a replacement cost (RC) profit of $3.2 billion this time last year. Admittedly, the culprit is the well-flagged $10.7 billion charge - $7.5 billion after a big tax credit - to settle claims arising from the Deepwater Horizon incident.

Continued oversupply and the recent deal between the west and Iran have sunk oil prices to their lowest since February. They averaged $62 a barrel in the three months compared with $110 during the same period in 2014. It's little wonder then that BP's quarterly underlying replacement cost profit fell from $3.6 billion to just $1.3 billion. That also includes $598 million of exploration write-offs and other costs in Libya, which caused a dive in profit at the exploration and production business.

The upstream division made just under $0.5 billion in the quarter, less than the first three months of the year and down from $4.7 billion a year ago. Consensus estimates had been for double that. Rosneft's contribution halved to $510 million as expected.

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However, investors were clearly happy to see the downstream operations - refining, lubricants and petrochemicals - makes $1.9 billion, more than twice as much as a year ago and slightly more than consensus forecasts. With a 10 cents-per-share dividend for the quarter, BP also offers a chunky prospective dividend yield of almost 7%, which is attracting income seekers.

Elsewhere, BP reported capital expenditure of $4.5 billion for the quarter, over $1 billion less than last year. It's down $2.8 billion for the half-year total at $11.7 billion and the company now thinks full-year spend will come in well below its $20 billion target. Restructuring charges, meanwhile, will rise from the $1 billion announced in December to $1.5 billion by year-end.

On Deutsche Bank forecasts, BP trades on 12.5 times earnings per share (EPS) forecasts for 2015 versus Royal Dutch Shell on 11.8 times. The premium rises in 2016, however, with BP on 11.5 times and Shell 9.8 times. The broker likes them both, though, rating each a 'buy' with 485p price target for BP and 2,425p for Shell.

Of course, there's takeover fever in the air, and BP has been touted as a possible target now that the US court case is over. Shell is already paying £47 billion for BG Group. But, while there is a chance that BP will attract bid attention, its Russian interests may prove a stumbling block.

In terms of the technical, it will be interesting to see how the shares react at the trend line drawn from last June's high (see chart). The resistance level there is currently 408p.

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