BP Plc beat third-quarter earnings forecasts by a big margin in a sign Chief Executive Tony Hayward's restructuring plans were delivering results, with cost cuts ahead of targets and oil and gas output up strongly.

BP said third-quarter replacement cost net profit, which strips out unrealized gains or losses related to changes in the value of fuel inventories, fell 50 percent to $4.98 billion, due to lower oil and gas prices.

However, the underlying result was almost 50 percent ahead of average analyst forecasts, lifting BP's shares to their highest level since June 2008, before easing back to trade up 4.3 percent to 591 pence at 1100 GMT (7:00 a.m. EDT).

Shares in rivals such as Royal Dutch Shell Plc also rose, on hopes they could also mimic BP's success at cost cutting and weathering the oil price drop. The DJ Stoxx European oil and gas sector index <.SXEP> was up 2.3 percent.

Analysts said a lower-than-expected tax rate and positive foreign exchange impacts flattered the figures but could not take away from a strong result.

It's just blow-away numbers. It's good to see them bouncing back, said Jason Kenney, oil analyst at ING.

BP was helped by production rising in lower-tax areas such as the Gulf of Mexico, where the Thunder Horse platform, one of the largest offshore rigs in the world, ramped up in the first half of this year.

It shows you the kind of margin coming in from Thunder Horse. Light sweet crude on the doorstep of the U.S., and it's caught me and a lot others by surprise, Kenney added.

Brent crude prices averaged $68/barrel in the quarter, 40 percent lower than in the same period of 2008, while gas prices in the U.S. and UK fell around 65 percent.

DIVIDEND SAFE, HIGHER COST CUTS

A slight drop in BP's debt-to-equity, or gearing, ratio reassured investors that BP's fat dividends were safe.

Lower earnings meant BP and its rivals had to borrow in the first half of this year to pay dividends, or in some cases, were forced to cut their payouts.

Europe's second-largest oil company by market value said it had reduced costs in the oil and gas production and refining units by over 15 percent.

This progress has allowed BP lift its cost-cutting target for this year to $4 billion from $3 billion.

BP is harvesting the fruits of its turnaround program, Richard Griffith, analyst at Evolution Securities, said.

The reductions appear not to be at the expense of investments, with BP hinting at higher than earlier indicated capital expenditure for this year.

Rivals, including Shell, which reports on Thursday, have also put cost-cutting at the center of their strategy. BP's success is soothing skepticism on the part of some investors that significant and long-term reductions can be achieved.

After taking the helm of the oil giant in 2007, Hayward also committed himself to turning around the company's flagging refining unit and falling production.

The company said oil and gas production averaged 3.92 million barrels of oil equivalent per day in the quarter, up 7 percent compared to the same period in 2008.

Refinery throughput rates also rose, although an industry-wide drop in margins meant profits in the downstream unit more than halved.

Mark Bloomfield, oil analyst at Citigroup, cautioned that, after successfully implementing its turnaround, BP would find it harder to deliver additional gains, relative to rivals, in future quarters.

As momentum slows and with valuation full compared to peers -- BP trades at an 8 percent premium to the sector on an enterprise value to discounted cash flow basis -- the relative case may become more challenging, he said in a research note.

The third-quarter result was also helped by a rise in profit at BP's Russian joint venture, TNK-BP.

Excluding one-offs, the replacement cost net profit was $4.67 billion, compared to an average forecast of $3.16 billion from a Reuters poll of 11 analysts.

For a graphic showing BP profit and the oil price, click here: http://graphics.thomsonreuters.com/109/UK_EPSBP1009.gif

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