BP Plc, the U.K. oil company with the single-biggest foreign investment in Russia, warned that more sanctions against the country could hurt its business.
BP, with a 20 percent stake in OAO Rosneft, stands to lose the most from further sanctions in response to the country's annexation of Crimea. The European Union and the U.S. may act as soon as today to intensify punitive measures aimed at key sectors of the economy -- finance, defense and energy.
"Any future erosion of our relationship with Rosneft, or the impact of further economic sanctions, could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation," BP said in an earnings statement.
BP reported profit rose 34 percent in the second quarter, beating analyst estimates, including $1 billion underlying net income from Rosneft. That compares with $218 million from the Russian company a year earlier.
"To date, these sanctions have had no material adverse impact on BP or Ruhr Oel GmbH," a joint refining venture between BP and Rosneft, it said. "However, BP will continue to keep this under review."
A Dutch court ruled yesterday in favor of former Yukos Oil Co. officials, ordering Russia to pay $50 billion for seizing what was once the country's largest oil producer. The decision risks dragging Rosneft and natural gas exporter OAO Gazprom into extended legal wrangling. The state-run companies may be targeted because they were beneficiaries of expropriated Yukos assets.
The shares fell as much as 1.3 percent to 490.50 pence, trading near the lowest price in three months. They were down 0.8 percent at 492.90 pence at 10:13 a.m.
Earnings adjusted for one-time items and inventory changes rose to $3.6 billion from $2.7 billion a year earlier, the London-based company said in the statement. That beat the $3.4 billion average estimate of 13 analysts in a Bloomberg News survey. The quarterly dividend was unchanged from the previous three months at 9.75 cents a share.
While total energy production declined due to disposals, the company brought online projects with better returns, it said. U.S. output rose 28 percent in the quarter from a year earlier, boosted by new assets in the Gulf of Mexico.
"We are continuing to ramp up the major new projects that drive delivery of cash flow and are also now seeing benefits from our focus on operating with greater reliability and efficiency," Chief Executive Officer Bob Dudley said in a statement. "This was another successful quarter, delivering both operational progress and robust cash flow."
Five new projects started production this year, including three in deepwater off the Gulf of Mexico and the CLOV project in Angola, which produced first oil in June. Two more projects are expected to start in 2014.
The end of BP's Abu Dhabi concession in January together with divestments meant overall production was 6 percent lower at 2.1 million barrels of oil and gas a day. Underlying output, which strips out disposals, was 3 percent higher. Improved margins from its newly upgraded U.S. refinery and a stronger contribution from Rosneft also helped profits, BP said.
Rising production from higher-margin fields and increased processing from the newly modernized Whiting refinery in Indiana contributed to operating cash flow of $7.9 billion, with the total for the first half at $16.1 billion.
"These were a strong set of results," said Anish Kapadia, an analyst at Tudor Pickering Holt & Co. in London. "It was particularly encouraging to see increased oil production from the U.S. as well as a good contribution from Rosneft, putting them on track to meet the $30 billion to $31 billion target for cash flow for the year."
BP said production is expected to be lower in the third quarter versus the previous three months because of maintenance. The explorer has the greatest scope among the oil majors to rein in operating costs, with potential savings of $1.4 billion a year, according to analysts at Sanford C. Bernstein & Co.
Norway's Statoil ASA last week reported a drop in profit on lower production because of maintenance and asset sales, while Spain's Repsol SA said adjusted net income was 2.7 percent lower than a year earlier as unrest in North Africa curtailed output.
Total SA, Europe's second-largest oil company, reports second-quarter earnings tomorrow, while Royal Dutch Shell Plc, Europe's largest oil company, will report on July 31.
BP raised cost estimates for the 2010 Gulf oil spill to $43 billion from $42.7 billion for additional legal estimates.