BP turnaround plan boosts shares as profits fall

By Tom Bergin

LONDON (Reuters) - Oil group BP Plc (BP.L) stepped up the pace of its turnaround on Tuesday, outlining a plan to slash its workforce by 15 percent, cut over $1 billion in costs and adopt a more generous dividend policy, boosting its shares despite a big drop in profits.

The third-largest Western oil company by market capitalization has suffered a series of mishaps in recent years including pipeline leaks in Alaska, delays in big projects which led to production falls and a blast at a U.S. refinery that killed 15 workers and highlighted systemic safety flaws.

Since his appointment in May last year, Chief Executive Tony Hayward has been working on a turnaround plan.

His decision to raise BP's dividend by 31 percent and a promise to favor dividends over buybacks in future was seen as a sign of confidence in BP's future ability to generate cash.

"The dividend is certainly a boost and underpins the commitment to cash returns to shareholders which I think will be rewarded eventually," said Jason Kenney, oil analyst at ING.

Investors also welcomed a planned reduction in administrative and management costs, which BP said would save $1-$1.5 billion per year from 2009, although this would involve restructuring costs of $1 billion in 2008.

Savings will be achieved by axing 5,000 jobs and shifting another 9,500 U.S. service station staff to franchisees out of a company total of 97,000 jobs now.

Hayward also reaffirmed BP's production growth plans to 2012, despite some rivals, such as Royal Dutch Shell Plc, dropping growth targets as access to new reserves becomes more difficult and higher oil prices reduce the amount of oil companies are entitled to from joint ventures with governments.

BP's output fell 3 percent in 2007 compared to 2006, to 3.8 million barrels of oil equivalent per day.

"The production numbers for 2008 and 2009 are in line or a little bit higher than people were expecting, so the story going forward looks better than the story they have just produced," said Colin Morton of Rensburg Fund Management.

BP shares traded up 0.5 percent at 544-1/2 pence at 1525 GMT, outperforming a 1 percent fall in the DJ Stoxx European oil and gas sector index .SXEP.

In the past two years, BP's shares have fallen around 17 percent, compared to a 3 percent fall for Shell and a 9 percent fall for France's Total (TOTF.PA).

PROFITS FALL

BP's replacement cost (RC) net profits, which strip out unrealized gains on inventories, fell 22 percent to $17.29 billion in 2007, despite strong crude prices, which went on to hit a record above $100 per barrel in January.

Hayward blamed problems at BP's U.S. refineries, including low throughput and margins, for the fall, although a drop in output and rising costs also weighed.