Why BP (and Big Oil) just can’t lose

October 27, 2011, 6:15 PM UTC

By Shelley DuBois, writer-reporter

FORTUNE — It’s been a big week for BP. Not only did it report better-than-expected earnings on Monday, but yesterday it received the first permit to resume drilling in the Gulf of Mexico since the catastrophic oil spill last year. The company appears to be on track, albeit in repair mode, and gearing up for a kind of drilling homecoming in the Gulf.

The press around the company this week has been cautiously positive. This is a far cry from what it was over a year and a half ago. In April 2010, outrage at BP (BP) spread as pictures of a burning oil rig, owned by Transocean (RIG) and operated by BP, circulated through the press. The explosion on the rig caused a well leak that the company couldn’t control — it took 86 days and several failed attempts to stop the crude from hemorrhaging into Gulf waters. BP’s leadership seemed tone-deaf and slow. Then-CEO Tony Hayward said he wanted his life back, when 11 workers had died on the Horizon rig. And there was even speculation that the oil giant would go bankrupt.

Now, BP is holding its own during Big Oil earnings week. The energy company’s profits nearly doubled from the same quarter last year, from $1.8 billion to $4.9 billion. Net revenue increased by about 31% to $97.6 billion.

Behind the earnings jump

The sizable jump in net income comes partly on account of the immense spill-related costs that were on the company’s balance sheet last year. And BP, which did not respond to a request for comment, is still feeling financial pangs from the disaster. This quarter’s earnings declined by just under 4% from the same quarter the previous year, from $5.3 billion to $5.5 billion, in part due to BP’s efforts to sell expendable assets and stash cash to pay for damages. This has meant BP hasn’t produced as much oil. Its production decreased by about 12% from a year earlier to the equivalent of 3.3. million barrels a day. Ultimately, it’s unclear how much the spill will cost the company, the 2011 third quarter earnings report said.

Certainly, BP has significant exposure. It has become increasingly dangerous to drill oil on account of political risks tied to allying with unstable foreign governments, as well as physical risks such as exploring highly technical terrain like deep water.  

But pretty much every oil company faces those same risks. And just about every company, BP included, is poised to profit off of the high price of oil. Exxon (XOM) reported this morning that earnings jumped 41% to $10.3 billion compared to the same time last year, thanks to the high price of oil, but it’s production levels remained fairly flat. And Wall Street expects Chevron (CVX) to report high earnings tomorrow morning.

So despite being responsible for the worst spill in U.S. waters, BP is fine. And despite the outcry against BP’s safety practices in deep water, the company is pushing onward with more offshore projects. Just this quarter, BP received leases to drill in new deepwater blocks off the coast of Trinidad and Tobago. The company also expects other permits to follow the one it received yesterday to drill in the Gulf, BP’s bread-and-butter region.

Beyond petroleum, beyond the Gulf

Deepwater is only one slice of BP’s plentiful global assets. As many mistakes as it has made made, the company is very difficult, if not impossible, to kill. Any oil company would be, because even though they must work harder for their oil, the commodity is both extremely profitable and in increasingly greater demand. The Energy Administration Association’s international energy outlook predicts that global energy consumption will jump by about 53% between 2008 and 2035. While renewable sources of energy will make up the fastest-growing segment of the fuel mix in the future, fossil fuels will remain the dominant source.

It seems like any company with its hands on enough petroleum can afford to spill millions of gallons of crude with upsetting, but nonfatal, corporate consequences, even if that company is playing in one of the world’s most volatile markets.

In fact, huge, integrated oil companies can adjust to the volatility in the market. When the price of oil is low, exploration and production is expensive, but companies can rely on retail assets such as gas stations to benefit from the high profit margins at the pump. When the price of oil is high, then the exploration and production arms become the main moneymakers. The price of oil has been so high for so long that ConocoPhillips is planning to spin off its refining arm in 2012 and focus only on exploration and production.

Out of sight, out of mind

Financial stability aside, the flurry of bad press around BP has died down, despite the skeletons in its safety record that the spill revealed. Though there was over 5 million barrels worth, the oil that spilled in the Gulf entered an ecosystem that, though damaged, is full of petroleum-consuming bacteria. The oil that wasn’t dissolved by chemical dispersants or microbes fell to the bottom of the ocean, out of sight to the public.

BP’s new CEO Bob Dudley says the company has righted its course. Only time will tell, but Big Oil is capable of change. Exxon is a good example. Remember the Exxon 
? A drunk Exxon oil tanker captain ran the ship aground, spilling 11 million gallons of oil in Alaska’s formerly pristine Prince William Sound. It was ugly and inexcusable. But then, Exxon restructured itself.

Outwardly, the oil giant was stand-offish to the press about the incident. But it made internal changes, and the company now has some of the highest safety standards in the industry. Perhaps BP will follow suit. Its progress should be carefully watched, after such a big mistake.

But the bar for mistakes at Big Oil companies is so high, it’s hard to imagine how big an error would have to be to actually take one of them down.