Investment Column: BP still on line to exceed targets

Lord Simon, BP's erstwhile chairman, is now making bigger waves in the Westminster snake-pit than at the oil group he used to chair, but his legacy lives on in the group's love of metaphor to embellish its results presentations. For Simon it was football and cricket, but yesterday John Browne, the urbane chief executive, tried his hand less successfully at gardening. The question he was trying to illustrate, as so often with BP, was how long the company could outperform even the most bullish analysts' expectations.

The market was in no doubt yesterday, responding to the group's interim results with a 39.5p surge in the share price to 861.5p.

On the two clearest measures of "self help", BP's management mantra used to describe efficiency savings, the group has done well, yet again. The target this year is to cut $300m (pounds 184m) of costs from the business, an improvement BP almost achieved in the first half alone. The target has now been raised to more than $500m, a figure the company will no doubt comfortably exceed.

The other measure is BP's return on capital, which rose in the first half to 19 per cent, way ahead of even the most efficient rivals. Last year BP was pondering whether its increase in returns to 16 per cent was sustainable, while Shell, which reports results tomorrow, has struggled to better 12 per cent.

Aside from the elements BP can control, the notoriously uncertain global oil market continues to work largely in the group's favour. Though oil prices have fallen somewhat from last year's peak of almost $25 a barrel, they have not dropped back as far as expected.

Much still depends on whether Iraqi oil will hit world markets, shifting the supply and demand equation. Yet as Mr Browne pointed out, world demand for oil is up 4 per cent, encouraging investment in new fields.

To this rosy picture investors can add a new ingredient in the shape of BP's commitment to share buy-backs. With debts of little more than $6bn against targets of $7bn-$8bn, BP will next year buy back between $500m and $2bn of shares, according to analysts. In the meantime, the group has unveiled a "taster" in the form of a $500m purchase of existing shares to use for employee share schemes. With sensible debt management, BP can justifiably continue a cautious approach to acquisitions.

Despite intensifying competition, there is no reason to disbelieve BP's continually reinforced drive to beat its own targets, implying plenty of upside in the share price.

Investors should expect BP's full-year profits to rise from pounds 2.6bn to more than pounds 2.9bn, as efficiency savings continue to beat expectations, and the full-year dividend to go from 19.5p to around 22.5p.

Even on a forward price-earnings ratio in the high teens, the shares are still a buy.