April 28 (Bloomberg) -- BP Plc, Europe’s second-biggest oil company, reduced its 2009 spending target a second time and said cost cuts would exceed initial projections after posting a 64 percent slump in first-quarter profit.

Net income dropped to $2.56 billion, or 14 cents a share, from $7.09 billion, or 37 cents, a year earlier, London-based BP said today in a statement. Excluding inventory changes and one- time items, earnings beat analysts’ estimates.

Producers are postponing projects, deferring earnings targets and reducing investment after oil prices slumped about $100 from a record. BP pushed back the first heavy-crude production from its Sunrise oil-sands project in Alberta by at least a year in anticipation that oil-field services and equipment costs will drop.

“Earnings were a little ahead of analysts’ estimates and I think the dividend is safe,” Timothy Guinness, chief executive officer of Guinness Atkinson Asset Management, said in an interview. “We saw a very sharp rise in costs over the last two years” and oil companies are now trying to claw those back, he said.

BP is the second of Europe’s oil majors to report earnings. Eni SpA, Italy’s biggest oil company, last week said first- quarter earnings fell 43 percent to 1.9 billion euros ($2.5 billion). Royal Dutch Shell Plc, BP’s larger rival, is likely to report a 67 percent drop in profit excluding one-time items and inventory changes to $2.56 billion tomorrow, based on the median estimate of 11 analysts compiled by Bloomberg.

Dividend Raised

BP’s adjusted earnings were $2.58 billion. On that basis, profit was expected to be $2.2 billion, according to the median estimate of nine analysts surveyed by Bloomberg. Sales fell 47 percent to $48.1 billion. The quarterly dividend was raised 4 percent to 14 cents a share from the same period in 2008.

BP said capital spending, excluding acquisitions and asset exchanges, will be less than $20 billion this year, down from an initial estimate of as much as $22 billion. Chief Financial Officer Byron Grote said the company was poised to exceed a target of cutting costs by $2 billion this year.

Of the 38 analysts that cover BP, 23 recommend buying the stock, nine have “hold” recommendations and six advise clients to sell the shares. BP, which closed little changed at 483.5 pence, is down 8.1 percent this year.

U.S. oil futures averaged $43.31 a barrel in the first quarter, 56 percent lower than a year earlier, after plunging from a record $147.27 in July. U.S. natural gas futures averaged $4.468 per million British thermal units, down 49 percent. New York oil futures traded at $49.10 a barrel today.

Selling Prices

The average selling price for BP’s oil was about $41, down from $91 a barrel. BP sold its gas for about $3.63 per thousand cubic feet, from $5.88 last year.

Output at BP climbed 2 percent to 4.016 million barrels of oil equivalent a day in the quarter. That followed the ramp-up of the Thunder Horse platform in the Gulf of Mexico. Thunder Horse is currently producing more than 300,000 barrels of oil equivalent a day.

Refinery utilization rates rose as BP started operations at its Texas City and Castellon plants. The company’s refineries ran at an average rate of 92.3 percent in the period, up from 88 percent a year earlier.

BP is “restoring full economic capability” at its U.S. Texas City refinery after starting a so-called ultraformer, Chief Executive Officer Tony Hayward said in a memo to staff. The start of a coker unit at its Castellon plant in Spain is expected to “significantly enhance margin capture,” he said.

Refining Margins

Refining margins, or profits from turning crude into fuels such as gasoline and diesel, also gained in the period. BP’s Global Indicator Margin, a broad measure of refining profitability, rose to $6.20 a barrel from $4.64 a year earlier, according to data posted on BP’s Web site. U.S. Midwest margins increased to $7.03 a barrel from $1.11.

BP expects its crude inventory to drop by the end of the second quarter as the premium of longer-dated oil futures to immediate contracts, narrows.

The producer stored oil last quarter to “capture the benefits” of the so-called contango market, Grote said on a Webcast, boosting profit at its trading business.

Net debt totaled $26.7 billion at the end of March, while BP increased its debt leverage ratio, or gearing, to 23 percent from 19 percent a year earlier. The company is seeking to maintain gearing at 20 to 30 percent, according to David Nicholas, a BP spokesman.

BP’s share of profit from its joint venture in Russia, TNK- BP, was $134 million, down from $744 million a year ago. That followed a $682 million loss in the final three months of 2008.

To contact the reporters on this story: Eduard Gismatullin in London at egismatullin@bloomberg.netFred Pals in Amsterdam at fpals@blomberg.net

Last Updated: April 28, 2009 12:06 EDT