British oil major BP Plc reported a lower than forecast 33 percent rise in fourth-quarter replacement cost profit as refining margins were squeezed and warned an operational turnaround would slow in 2010.

Europe's largest oil company by market capitalization said on Tuesday it had addressed a number of areas of investor concern in 2009, lifting production of oil and gas 4 percent, bringing its refineries back up to full capacity and finding more oil than it produced in the year.

However, Chief Executive Tony Hayward said output was likely to fall in 2010, refining margins would stay depressed and predicted a hit from currency movements.

The CEO also hinted BP would achieve much lower cost savings in 2010, after cutting $4 billion off the cost base in 2009.

They've seen the fruitition of a number of programs to improve performance ... people will be looking for reassurance about medium term growth, said Ivor Pether, fund manager at Royal London Asset Management.

Hayward added that while oil prices, whose recovery was the main driver of BP's quarterly earnings rise, were well supported by OPEC, gas prices would remain volatile.

This is partly because BP expects the economic recovery in the United States and Europe to be slow and gradual.

It will take three to four years to get back to the same level of economic activity we saw in 2007/08, Hayward said.

BP's results compare with lower fourth-quarter earnings at U.S. rivals Exxon Mobil Corp and Chevron Corp and expectations of a drop at Royal Dutch Shell Plc on Thursday.

However, analysts at Citigroup said the weak outlook for 2010 production would dent the consensus view that BP can continue to produce better earnings than its rivals.

BP's shares outperformed peers in 2009, and fears that the turnaround Hayward launched in 2007 was losing steam hit the stock, which closed down 3.8 percent at 572 pence, lagging a 0.2 percent drop in the DJ Stoxx European oil and gas sector index <.SXEP>.


BP said it was sticking to the 1-2 percent per annum medium and long-term production growth target it issued early last year.

After years of cutting its output target, this was welcomed by some analysts, but others had predicted the company would lift its target, which as recently as 2008 was 3 percent and in 2006 was 4 percent.

Analysts were divided on whether BP's turnaround had peaked.

ICAP and ING said BP's profits and shares could continue to outperform rivals in 2010 and that the dip in shares represented a buying opportunity.

However, Collins Stewart and Citigroup said a turnaround launched by Shell's CEO Peter Voser last year suggested it would offer better returns.

BP kept its quarterly dividend flat at 14 cents/share. Until oil prices collapsed in late 2008, investors were used to strong rises in dividends.

Even so, with BP's gearing at the bottom end of its target range, the London-based company offers one of the best and most secure dividends in the sector, analysts at Evolution Securities said in a research note.

BP said replacement cost profit, which strips out unrealized gains or losses related to changes in the value of oil inventories, was $3.45 billion in the quarter.

Excluding one-off and non-operating items, which amounted to a net charge of $937 million, the RC result was $4.38 billion, behind an average forecast of $4.65 billion from a Reuters poll of nine analysts.

The miss was mainly due to BP barely breaking even in its refining business, one of the most advanced in the industry.

Analysts had expected a weak quarter after average margins fell to their lowest level since the first quarter of 1995, but BP said its margins were even weaker than the average. Nonetheless, Exxon and Chevron reported downstream losses.

Refining boss Iain Conn said the world had spare refining capacity of around 8 million barrels/day and predicted many smaller and less sophisticated refineries would have to shut.

Shell said last month it planned to convert its Montreal refinery into a fuel storage terminal and is mulling the sale or closure of a number of refineries in Europe.

BP said output rose 3 percent in the quarter compared with the same period in 2008, to 4.05 million barrels of oil equivalent per day, thanks to new field start-ups in the Gulf of Mexico and the low impact of hurricanes.

2009 output rose over 4 percent, and BP said its reserve replacement rate was 129 percent last year. A level of 100 percent means the company matches production with new finds.

North Sea Brent crude averaged $74.53 a barrel in the quarter, BP said, compared with $55.48 in the same period of 2008. However, gas prices were sharply lower.

Oil prices in 2009 were also sharply lower than in 2008, which drove the 45 percent drop in annual profit to $14 billion.

(Editing by Eric Auchard, Erica Billingham and Will Waterman)