London (Platts)--1May2012/629 am EDT/1029 GMT

BP reported Tuesday a 13% year-on-year fall in adjusted earnings for the first quarter of 2012, missing market expectations, as lower production and sharply weaker downstream earnings offset the benefit of higher oil and gas prices.

Excluding one-time items and accounting effects, the company posted an underlying replacement cost profit of $4.79 billion for the first quarter, down 13% from $5.5 billion the year before.

Replacement cost profit for the quarter including items was $4.93 billion, compared with $5.61 billion a year earlier.

The adjusted result missed consensus forecasts of around $5.1 billion due mainly to higher upstream costs and a larger-than-expected $541 million accounting charge for intra-company sales between its upstream and downstream divisions.

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"BP's slightly weak Q1 numbers come as a disappointment following strong performances from Shell and Eni last week," Credit Suisse said in a note. "A weak refining and marketing result is disappointing given BP's structural location advantages in the US Mid-Con and Gulf Coast compared to its European peers."

BP's shares fell sharply in London after the results were announced and the stock was trading 3.5% lower at 429.30 pence by 0930 GMT.

PRODUCTION FALL

Outside Russia, BP said its oil and gas production for the quarter was 2.45 million barrels/day of oil equivalent, 6% lower than the first quarter of 2011, reflecting asset sales and the impact on production in the wake of the 2010 Gulf of Mexico oil spill.

In Russia, TNK-BP production rose 4% to 1.02 million boe/d net to BP, and in the quarter BP received a cash dividend from TNK-BP of $690 million.

Combined, BP's output in the quarter totaled 3.47 million boe/d, 5.7% lower than 3.49 million boe/d reported for the year-ago period.

BP began splitting out its reported volumes from the Russian venture TNK-BP earlier this year.

Higher upstream costs and falling output combined to offset an average realized oil price of $108.13/b in the quarter, up from $93.93/b in the year-ago period, BP said.

"Looking ahead, we expect second-quarter reported production to be lower, and costs to be higher, as a result of normal seasonal turnaround activity concentrated on high-margin production in the Gulf of Mexico at Atlantis, Mad Dog and Holstein," BP said.

BP has said it expects its reported production to be lower than the 3.45 million boe/d average in 2011, with underlying production in 2012 to be broadly flat, excluding TNK-BP.

BP said it remains on track to start up six new major upstream projects this year, with Clochas-Mavacola in Angola and Galapagos in the Gulf of Mexico expected to start in the second quarter.

"We have made a good start against our strategic priorities for 2012," CEO Bob Dudley said in a statement. "During the quarter we gained access to significant new deepwater and US shale exploration acreage, our ongoing divestment program has reached $23 billion, and we have five deepwater rigs at work in the Gulf of Mexico."

BP has already agreed to sell some $23 billion in assets to strengthen its balance sheet as it meets the costs of the 2010 Gulf spill, but still has more assets to shed to hit a target of raising up to $38 billion from sales by the end of 2013.

The impact of divestments is expected to be around 120,000 boe/d in 2012 compared with 2011, BP has said, depending on the timing of the assets sales.

WEAKER REFINING

Downstream, BP reported a replacement cost profit of $856 million for the quarter, down from $2.08 billion a year earlier, due to a weaker refining margin environment and lower petrochemicals margins.

BP said the result was hit by a "significantly weaker" performance from supply and trading, unfavorable local crude differentials in Europe, a difficult fuels marketing environment resulting from weaker demand, and the impact of the temporary shutdown of its Cherry Point refinery following a fire in February.

The company said it expects refining margins to improve in line with seasonal trends during the second quarter, with fuels marketing volumes and petrochemicals margins to remain "subdued". The Cherry Point refinery is expected to resume full operations in May having completed both repairs and the scheduled second-quarter turnaround, BP said.

BP reiterated its guidance that sale of its Texas City and Carson refineries is still expected to be completed by end 2012 and that the Whiting refinery upgrade is expected to start up in second half of 2013.

The petrochemicals business delivered an underlying replacement cost profit before interest and tax of $112 million in the first quarter, compared with $519 million in the same period last year.

--Robert Perkins, robert_perkins@platts.com

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