* Q1 replacement cost net ex one-offs $4.80 bln vs f'cast $5.10 bln
* To sell 50,000 bbls/day output in Gulf of Mexico
* Increases estimate of cost of cleaning up Gulf
* Worries over recovery, output seen continuing to fall
* Shares down 3.6 pct vs 0.2 pct sector decline
* TNK-BP accounting change causes sale speculation
By Tom Bergin
LONDON, May 1 (Reuters) - BP Plc reported a bigger-than-expected profit drop on the back of a fall in production prompted by the need to sell oil fields to pay for the Gulf of Mexico disaster, raising concerns about the oil group's turnaround plan.
Europe's second-largest oil company by market value said on Tuesday output would continue to decline in the second quarter, helping send its shares down 3.6 percent to 429.3 pence by 0924 GMT against a 0.2 percent drop in the STOXX Europe 600 Oil and Gas index.
The shares are down 8.9 percent so far this year, against a 1.8 percent average drop among its industry peers.
Analysts at Citigroup said they had doubts about BP's ability to increase output, keep a lid on costs and maintain its interest in key assets where it has had disputes with partners.
The financial headwinds also mean BP will struggle to raise its dividend to the level it was at before the spill, when it was slashed, analysts at brokerage Bernstein said in a note.
BP unveiled plans to sell a number of mature fields in the Gulf but a spokesman denied the company was making a more general pullback from the region, saying the disposals reflected a new strategy of churning assets more quickly and focusing on larger, younger projects.
The London-based group added it would have to spend more than earlier expected to clean up America's worst-ever offshore oil spill, although this was offset by a drop in the expected cost of paying out claims after the company agreed a settlement with impacted individuals and businesses.
BP said its replacement cost (RC) net profit fell to $4.93 billion in the first quarter, compared with $5.61 billion in the same period last year. The drop was also driven by weaker refining results.
Stripping out one-off items such as the profit on asset sales, the result was down 13 percent to $4.80 billion, below an average forecast of $5.10 billion from a Reuters poll of nine analysts.
"There is little in the numbers for the bulls," analysts at Nomura said in a note to clients.
TOUGH CONDITIONS
BP said oil and gas production, excluding its Russian joint venture TNK-BP, was down 6 percent at 2.45 million barrels of oil equivalent per day (boepd).
Citigroup said production costs had also risen, due to measures BP has taken to address safety concerns following the Gulf of Mexico blowout which killed 11 and led to the spill.
Further output drops are seen in the second quarter, while the sale of the Gulf of Mexico fields on the block, which include Holstein and Marlin, will cut another 50,000 boepd.
BP pumped around 260,000 boepd in the Gulf last year, down from around 400,000 boepd before the spill.
Delays in securing drilling permits - a problem across the industry following a moratorium in 2010 - have contributed to the fall in output. But BP says business is gradually returning to normal in the Gulf.
Chief Executive Bob Dudley, who took over in the wake of the Gulf spill, has pursued a strategy that analysts have described as "shrink to grow", selling old fields more quickly than the group did in the past and focusing investment on new projects.
However, not all analysts are convinced BP will be able to generate new leads quickly enough to replace the assets being sold. Investors are also worried about the continuing legal uncertainty facing the group because of the spill.
The Department of Justice is investigating possible criminal and civil charges against BP that could lead to fines of more than $20 billion, although BP says it expects fines of only around $3.5 billion.
Last month BP reached a proposed settlement to resolve economic, property and medical claims by more than 100,000 individuals and businesses.
Though BP estimated the deal would cost it $7.8 billion, the company was able to reduce its provision for likely costs of compensating victims and, after deducting the increased cost of shoreline cleanup, BP took a $24 million credit in the quarter's earnings.
BP also raised speculation that it could sell its 50 percent share in TNK-BP, after it published the results of the unit separately, one dealer said. The company has had reputed disagreements with its oligarch partners in TNK-BP.
The spokesman said the new reporting practice was simply to increase transparency, while one analyst said it didn't make sense for BP to sell when the interest was throwing off a lot of cash.
BP's 13 percent drop in underlying profit compares with a 16 rise at Royal Dutch Shell Plc last week, a 1 percent drop at U.S. rival ConocoPhillips and an 11 percent drop at industry leader Exxon Mobil Corp.
Brent crude prices averaged $118.60 per barrel last quarter, up from $105.43 in the same period a year before.
RC earnings strip out unrealised gains or losses related to changes in the value of inventories, and as such are comparable with net income under U.S. accounting rules.
BP's Q1 earnings slip 13% on lower output, weak downstream
RPT-UPDATE 1-UK Stocks-Factors to watch on Tuesday, May 1
Taking Advantage Of American Electric Power's Dividend
Exxon Mobil (NYSE:XOM) Propelled Up For $94 Although Lighter Earnings- XOM ...
Colonial Virginia Bank Announces 1st Quarter 2012 Operating Results
Loading comments… 
Reuters | Posted: 05/ 1/2012 2:48 am Updated: 05/ 1/2012 8:06 am