BP said Tuesday its fourth-quarter profit dropped 22% to a two-year low, driven down by the declining price of oil and increased safety spending after a series of high-profile mishaps including a deadly refinery blast in Texas and an oil spill in Alaska.
The oil company also slashed its growth targets and raised its capital expenditure forecast for this year.
BP said adjusted net profit dropped to $2.88 billion, from $3.69 billion a year ago. Adjusted net profit measures earnings before extraordinary items and excluding changes in the value of inventories.
Revenue for the fourth quarter, including asset disposals, fell 1.6% to $62.8 billion.
Over the full year, adjusted net profit fell 1.3% to $22 billion, from $22.3 billion in 2005. Revenue rose 11.7% to $274.3 billion, from $245.5 billion.
BP was the last of the major oil companies to report earnings. Oil companies have been recently stung by a steady decline in crude oil prices, which have plunged more than $20 per barrel from their peak reached last summer. Chevron on Friday reported its first quarterly profit decline in more than a year, but the second largest oil company in the U.S. still ended up with its third consecutive year of record earnings.
BP's increased safety spending follows criticism of its operating standards after a fatal explosion at its Texas City refinery in 2005 and an oil spill in an Alaskan pipeline.
"The fourth-quarter result reflects the recent declines in the overall price and margin environment, as well as operational factors and increased safety and integrity investments," said outgoing Chief Executive John Browne.
"We remain committed to addressing the recent operational issues while executing our strategy with discipline and focus."
BP announced last month that Browne, whose ability to stay in control of the company had been the subject of intense speculation, would resign at the end of July, bringing his expected departure forward by more than a year.
Browne will be succeeded by Tony Hayward, the current head of exploration and production, who oversaw BP's expansion trail into the United States, involving a number of takeovers, including the 1998 merger with Amoco and the subsequent acquisitions of Arco and Castrol. Andy Inglis, a veteran of the company's upstream business, will take Hayward's job.
BP's earnings were the lowest of the three of the biggest oil companies. Last week, Royal Dutch Shell PLC reported a 21% jump in fourth-quarter net income to $5.28 billion and Exxon Mobil Corp. posted net income of $10.3 billion.
BP's fourth-quarter replacement cost profit - which measures the amount it would cost to replace assets at current prices and is viewed by many analysts as the best measure of an oil company's underlying performance - fell 12% to $3.89 billion.
For the full year, replacement cost profit was up 15% to $22.25 billion.
KBC Securities said the replacement cost profit was disappointing following a poor performance from BP's refining and marketing operations, which were hit by the impact of its Texas troubles, including increased spending.
The Texas City explosion that killed 15 people has so far cost the company around $2 billion in compensation payouts, repairs and lost profits. An independent report into the blast found that BP failed to emphasize safety at its U.S. refineries.
BP was also more pessimistic about future earnings, predicting that production would fall in 2007 and grow only slightly to the end of the decade, compared with earlier predictions of 4%annualized growth.
The company's output averaged 3.84 million barrels of oil equivalent per day in the fourth quarter, down 5% from a year earlier as growth in Russia, which account for around one-quarter of BP's production, slowed and because of the interruptions in Alaska and delays to the startup of the company's Thunder Horse platform in the Gulf of Mexico.
A further disappointment to the market was the news that capital expenditures would be around $18 billion in 2007, up from the $16 billion it had estimated last year.
Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers, said there was a positive note to the earnings statement.
"BP must be relieved that along with these numbers 2006 can finally be consigned to history," Hunter said. "On balance, the market consensus is cautiously positive and BP is still generally preferred to Royal Dutch Shell as the core holding in the sector."