BP Books Passable Profits

BP's (NYSE:BP) first-quarter investor presentation on Tuesday morning was kept short and sweet at barely 11 minutes. Actually, the tone of the call was rather morose. But they kept it short, anyway. The supermajor's replacement cost profit, which corrects for commodity price distortions on unsold inventories, fell by 17% over last year. Results were even worse if one excludes non-operating gains. Let's take a look at each segment to see why profits were punk.

Exploration/production, known as the upstream business in oil-speak, is the core business segment of any large integrated oil company, whether you're talking about Total SA (NYSE:TOT), ConocoPhillips (NYSE:COP), or Statoil (NYSE:STO). BP's E&P segment was hit by a variety of factors, but generally, you know it's a bad quarter when you see a company reporting lower sales prices and lower volumes. After backing out non-operating items, E&P results were down over 26%.

E&P and the downstream refining/marketing unit alike were hit by greater integrity spend, which means "let's not have any more of those nasty explosions this year, please!" This integrity spend, combined with other refinery hiccups, resulted in flat operating results in an environment of strong refining margins.

Gas/power/renewables is not yet a large enough segment to really move the needle on a quarterly basis, but it, too, was down. On the renewables front, the company pointed to 500 megawatts' worth of planned wind projects as a notable development. For a company of BP's size, that is downright dinky. Unfortunately, so are the two new "mega" solar plants in Spain and India. I'm not being dismissive of BP's laudable commitment to alternative energy, but a meaningful return on these investments just looks like a distant prospect today.

So how can BP get back on point? One problem with being so Brobdingnagian is that the company can really only justify hunting big game -- in other words, the largest potential reserves as yet undiscovered in the world. I foresee reserve replacement becoming more dependent on making world-class finds. If these aren't forthcoming, the company will continue to struggle to maintain production, let alone increase it.

For other Foolish views on BP:

• The Best International Stock for 2007: BP
• BP's Bad News
• Can BP Do Better?

Philip Durell and his Inside Value team love hunting for "wounded elephants" in the market. To see which large, out of favor businesses they have recommended to subscribers, take a 30-day free trial.

Fool contributor Toby Shute prefers hunting small game. He's never invested in a company with a market cap over $10 billion, so he definitely doesn't own shares in any company mentioned. Total is a Motley Fool Income Investor selection. The Motley Fool's disclosure policy doesn't struggle under its own weight.