Oil and Gas

UPDATE 5-Oil major BP ups cost cut target as profits dive

* Cost saving target raised to $3 bln from $2 bln

* Profits down 53 pct to $3.14 bln

* Oil and gas production up 4 percent

* BP shares fall 3 percent (Adds background; updates share price)

By Tom Bergin

LONDON, July 28 (Reuters) - Oil giant BP Plc BP.L said it had increased its cost reduction targets for 2009 by 50 percent to $3 billion, as it reported a halving in second quarter profits due to lower oil prices and weaker refining margins.

Europe’s second largest oil company by market value said on Tuesday it had achieved its original 2009 target of $2 billion in cuts in the first half of the year, confounding analysts who predicted the industry would be unable to roll back the big cost rises of recent years.

“BP may not be able to control the price of oil, but their measures to streamline the business and reduce costs shows the board is in tune with the ebbs and flows of the market,” said Manoj Ladwa, senior trader at ETX Capital.

Oil companies are reacting to the collapse in oil prices from a high above $147/barrel in July last year to around $70/bbl now by slashing exploration, production and refining costs, which doubled since 2004.

“BP has now thrown down the gauntlet to the rest of the oil supermajors, who will report their numbers over the next few days,” said Richard Hunter, Head of UK Equities at stockbrokers Hargreaves Lansdown.

The five biggest Western oil companies by market capitalisation, which include Royal Dutch Shell RDSa.L, France's Total TOTF.PA and U.S. companies Exxon Mobil XOM.N and Chevron CVX.N, are known in the industry as the "Supermajors".

BP shares closed down 3.1 percent at 503 pence, underperforming a 2.5 percent easing in the DJ Stoxx European oil and gas sector index .SXEP.

The drop likely reflected profit taking, ING analyst Jason Kenney said, after BP shares outperformed rivals in recent months.


BP investors’ joy at the good progress on costs was also tempered by the fact that much of this was due to the stronger dollar and lower energy costs, which helped the downstream unit as refineries are major energy users.

Nonetheless, Chief Executive Tony Hayward said most of the savings had come from BP’s actions to make itself leaner, namely by cutting overheads. Going forward, BP hopes to benefit from deflation in its supply chain.

“It’s coming. It will take a year to 18 months to feed through,” he told a press conference.

Many analysts have said they expect BP and its rivals will find it hard to squeeze material price cuts from suppliers. A buoyant outlook from Norwegian oilfield engineering group Subsea 7 SUB.OL on Tuesday underscored the challenge they face. [ID:nLR223221]

Hayward said safety remained it’s “number 1 priority” despite the focus on cost reductions.

Cost cutting is a controversial subject at BP. During the last oil price downturn, when crude fell below $10/barrel, Hayward’s predecessor John Browne enforced swinging reductions.

These were later blamed by regulators, politicians and industry figures for safety and environmental problems including the 2005 Texas City explosion which killed 15 works and oil spills in Alaska.

London-based BP said replacement cost (RC) net profit, which strips out unrealised gains or losses related to changes in the value of inventories, was $3.14 billion in the second quarter.

Excluding one-off items RC net profit was $2.94 billion, ahead of an average forecast of $2.81 billion, from a Reuters poll of eight analysts.


Oil prices have been buffeted by falling consumption in many developed countries due to the global economic crisis and CEO Hayward gave a downbeat assessment for energy demand going forward.

“We see little evidence of any growth in demand and expect the recovery to be long and drawn out,” he said in a statement.

The CEO predicted an oil price of between $60 and $90 a barrel in the long term but said he expected prices at the lower end of that range in the near future.

BP said production of oil and gas rose 4 percent in the quarter compared to the same period of 2008, to 4.0 million barrels of oil equivalent per day, as new fields ramped up.

The company predicted output would continue to grow in the second half, suggesting it could report its first meaningful growth since 2004 this year.

BP said profits from trading oil and gas returned to normal levels, after being boosted by $500 million in the first quarter thanks to successful trading around volatile markets and sharply higher crude futures prices relative to spot prices.

For a separate COLUMN-BP: It’s the cash flow that counts: Neil Collins, please click on [ID:nLS654006] (Additional reporting by Paul Hoskins, Dominic Lau and Jon Hopkins; editing by Paul Hoskins, Hans Peters and Karen Foster)