BP ups cost-cutting target by $1bn as profits 'obliterate' expectations

Despite falling by half, profits of $5bn are $1.5bn higher than anticipated

BP is raising its cost-cutting target by $1bn (£612m) after a 50 per cent fall in the oil giant's third-quarter profits to $4.98bn (£3.05bn) beat analyst expectations by a wide margin.

Lower profits were widely expected given that crude prices of around $80, which is nearly 50 per cent lower than last year's unprecedented high of $147 per barrel, are pushing down profits across the sector.

But with BP's replacement cost profit – a key industry indicator that strips out fluctuating inventory values – some $1.5bn healthier than expected, and also higher than the previous quarter's $3.14bn, the group's shares rocketed to close up 4.81 per cent at an 18-month high of 594.4p.

Richard Hunter, the head of UK Equities at Hargreaves Lansdown, said: "The numbers have obliterated market forecasts, as evidenced by the spike in the share price."

BP's chief executive Tony Hayward put together a stringent cost-cutting programme, including 5,000 job cuts, earlier this year in response to the plummeting oil price. So far the group's cash costs have come down by more than $3bn as a result and BP is now predicting a $4bn saving over the year as a whole, $1bn more than it was forecasting three months ago and double the original expectation. The plans have been boosted by renegotiated contracts with suppliers and favourable exchange rate movements, the company said yesterday.

Alongside the cost-cutting, BP's profits were also helped by an unexpectedly low tax bill, and the weather. Production exceeded 3.9 million barrels of oil equivalent per day, some 7 per cent higher than the year before, thanks to this year's low incidence of hurricanes.

BP has had a string of good news from its exploration and production (E&P) division. Not only is its troubled Thunder Horse platform in the Gulf of Mexico finally producing at full stretch, but last month it announced a "giant" new discovery of more than three billion barrels at the nearby Tiber Prospect. It is also awaiting approval of a contract to develop the even bigger Rumaila field in Iraq, in partnership with China's CNPC. And earlier this week the company announced plans to farm into Jordan's Risha concession, subject to state approval.

Mr Hunter said: "A behemoth such as BP needs to run to stand still to maintain its cash generating capabilities over the longer term."

Overall, the E&P division reported pre-tax replacement cost profit of $6.3bn, down by $5.2bn compared with last year. The refining and marketing business is also still wrestling with margins depressed by the low oil price and the division reported pre-tax replacement cost profit of $1.1bn, down by $250m. Malcolm Graham-Wood, the director of HansonWesthouse, said: "Downstream refining margins are still poor but operational improvements and cost take-out have softened the blow."

BP's net debt is down by $800m to $2.43bn over the year to date, while its target for capital expenditure next year remains level at $20bn.

Royal Dutch Shell and Exxon Mobil report quarterly earnings tomorrow.