Over the hump

BP: The worst may be over for oil and gas majors, if BP is anything to go by. The UK oil major’s net profits almost halved in the third quarter, relative to the same period in 2008. But they were up on the preceeding three months and the drop was much less than investors feared. BP, and newish chief executive Tony Hayward, can take as much credit for the performance as the recovering oil price.

All the big oil groups have been bearing down on costs this year, but BP’s efforts have been especially successful. The group expects expenses to shrink by around $4 billion in 2009, a 13 per cent fall on last year, and compared with a previous target of $3 billion. Some of the efficiency gains are really just the benefit of a weak dollar. A lower effective tax rate in the third quarter also helped. But at least 60 per cent of the targetted savings are genuinely operational.

Better still, BP’s production volumes are rising. The group pumped 7 per cent more barrels of oil or oil equivalent in the quarter thanks to the ramp-up of its flagship deepwater Thunderhorse platform in the Gulf of Mexico, and the absence of hurricanes. Refining volumes are back to where they were before the explosion in the Texas City refinery in 2005.

BP can now balance its books with oil at less than $60 a barrel, well below the current $79. After all, BP actually reduced its net debt by $800m in a quarter when the oil price averaged about $68 a barrel, but where gas prices and refining margins were especially weak. This should put to rest any lingering doubts over the sustainability of the dividend this year and probably next.

The shares have outperformed rival Royal Dutch Shell over the past year, extending their lead with a 4 per cent gain in morning trading on October 27. From here, it will take further pleasant surprises on cost savings for BP to stay ahead. Shell has some big projects yet to come on stream, but there are questions over BP’s growth in the medium term. Hayward has his work cut out if this isn’t to be as good as it gets for BP.