British oil major BP (NYSE:BP) announced its Q1 results, posting a drop in replacement cost (RC) profits to $4.92 billion, from $5.61 billion a year ago.  The declining profits were explained by a $986 million inventory holding loss, falling output and weak refining profits. Lower volumes weakened the company’s earlier views that its output would bottom out in the second quarter of last year. The drop was tempered by the impact of high crude prices, which also softened the blow from low gas prices in North America. Lower output has also weakened the results of competitors such as ConocoPhillips (NYSE:COP).
We are in the process of revising our 59.51 price estimate for BP, which is at a 40% premium to the current market price.
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BP started a major asset sale program to raise resources to pay for the Gulf of Mexico spill in 2010. The company has expanded the sale program to dispose assets with low returns to focus on new upstream projects. The asset sales have impacted its production levels and pulled down profits. Last year, BP had said that its new projects in Angola and the North Sea should help it revive its upstream output. In the latest earnings, the company unveiled plans to sell more mature assets in the Gulf, which should see the production fall further in the next quarter. 
In another significant announcement regarding the gulf spill, the oil major said that higher clean-up costs could offset the lower-than-expected claims settlement with third party claimants. However, the company is ramping up new drilling in the Gulf, boosting the number of rigs it has in the region to 5.  BP owns a large acreage in the U.S. GoM and the area remains central to its plans to raise output, going ahead.
BP said in a statement that its profits were also impacted by the tough conditions facing the downstream industry. However, the profits in the lubricants, fuels and petrochemicals business did show an improvement over the last quarter, as expected. However, as persistent high oil prices continue to eat into end customer demand, we expect downstream margins to remain depressed, going forward.