Kate Mackenzie Where will BP’s cost savings come from?

Among BP’s second quarter results the company said it had already met and exceeded its target of cutting $2bn for the year and was raising its operational savings target to $3bn.

In the first quarter BP reported it had progressed with $1bn of those savings. But where did they come from? Citi’s Mark Bloomfield noted that “Although the like-for-like improvement is unclear, as the impact of helpful forex moves is not disclosed, it represented about a third of the c$1bn achieved at

Neil McMahon at Bernstein Research has already noted that other sources of the 1Q savings:

Specifically BP announced a $2Bn year-on-year cost reduction program, of which $1Bn was achieved in Q1. However from the Q1 transcript it seems that in fact around 40% of that was attributable to the lack of repairs that had to be paid for last year, and foreign exchange impacts accounted for 30% of the $1Bn, leaving only $400Mn as pure controllable cost reductions.

However BP has been early and aggressive with its cost reductions. Job cuts were announced soon after Hayward became chief executive in 2007, and the number was  then confirmed at 5,000 early last year. Those cuts are nearly complete – in April Hayward bragged the company’s headquarters in St James, London were “like the Marie Celeste” as job cuts had taken place.

The cuts appear to have been realised more quickly than thought and that the scope of cuts was likely being widened, Gordon Gray at Collins Stewart said. “The market’s gained quite a lot of confidence in their ability to deliver this.”

Related links:

BP profits halve to $3.14bn (FT, 28/07/09)