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 50 percent ahead of average analyst forecasts, lifting BP's shares 4.7 percent to 594 pence at 0904 GMT (5:04 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 areas such as the Gulf of Mexico, where taxes are lower than in locations such as Russia, thanks to new projects such as the Thunder Horse platform, one of the largest offshore rigs in the world, which 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.

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.

HIGHER COST CUTS

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.

These results demonstrate real operational momentum across the company. We continue to transform our cost base, Hayward said in a statement.

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 3.917 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.

The operational turn-around, which commenced in late-2007 has been largely delivered, Mark Bloomfield, oil analyst at Citigroup, said in a research note.

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.

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