BP reported a 24 percent drop in fourth-quarter net profit to $2.97 billion (1.5 billion pounds) on Tuesday, as charges related to selling service stations, weak refining margins and higher costs outweighed the benefit of higher oil prices and a small rise in output.
The third-largest Western major oil company by market capitalisation said in a statement full-year earnings fell 22 percent to $17.29 billion.
Chief Executive Tony Hayward described the fourth quarter results as "very disappointing".
Excluding non-operating items which amounted to a net charge of $1.03 billion, the fourth-quarter replacement cost profit, which strips out changes in value of inventories, was $4.002 billion.
A Reuters poll of 11 analysts gave an average forecast of $4.455 billion for London-based BP's replacement cost profit, excluding one-off items.
BP said production rose almost 2 percent in the quarter compared to the same period in 2006, the first rise after nine quarters of falling output.
The London-based company also said that in future it would have a bias for distributing cash to shareholders via dividends, rather than buybacks. This is in line with the strategy followed by rival Royal Dutch Shell.
