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REUTERS: UPDATE 2-BP profits fall but div, cost cuts boost shares

Tue Feb 5, 2008 3:37am EST(adds details)
By Tom Bergin

LONDON, Feb 5 (Reuters) – Oil giant BP (BP.L: Quote, Profile, Research) reported a big drop in profits due to refining losses, service station write-downs and rising costs, but higher production, planned cost cuts and a more generous dividend policy helped push its shares higher.

The third-largest Western oil company by market capitalisation said on Tuesday that full-year replacement cost (RC) profits fell 22 percent to $17.29 billion, despite a big rise in crude prices.

Fourth-quarter RC profit, which strips out unrealised gains on fuel inventories, fell 24 percent to $2.97 billion. Underlying profits fell below analysts’ forecast range.

“Our fourth-quarter results were very disappointing,” Chief Executive Tony Hayward said in a statement.

Weak crude processing margins led to a $1.3 billion loss at BP’s mainly U.S.-based refining division while the planned sale of its U.S. service station network forced the London-based company to take a $600 million charge.

However, there were signs of recovery in the quarter, with an almost 2 percent rise in production compared to the same period in 2006, the first rise after nine quarters of falling output.

The London-based company pointed to an improvement in its financial performance with plans to cut corporate overheads by 15-20 percent by axing 5,000 jobs and outsourcing another 9,500 to franchisees.

DIVIDENDS OVER BUYBACKS

BP added 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 Plc (RDSa.L: Quote, Profile, Research).

The company has also raised the forward oil price it uses when deciding whether to invest in projects to $60 from $40/barrel, suggesting it may be more aggressive in pursuing opportunities.

BP shares traded up 2.3 percent at 554-1/2 pence at 0821 GMT, outperforming a 1.3 percent rise in the DJ Stoxx European oil and gas sector index .

“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.

“It’s the end of the trough and the upturn starts in Q1 2008. It’s a buying opportunity in my book,” he added.

BP has suffered a series of problems in recent years. A blast at its Texas City refinery in 2005 which killed 15 workers, and which regulators blamed on cost cutting, ended up costing the company billions in settlements and lost profits.

Delays on starting up key projects and oil and gas leaks in Alaska also hit investor confidence in the oil major.

Excluding non-operating items which amounted to a net charge of $1.03 billion, the fourth-quarter replacement cost profit 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.

(Editing by Sue Thomas and Elizabeth Fullerton)

© Reuters 2008 All rights reserved

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